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Unfortunately, many conditions can lead to market failure    such that the market outcome does not maximize social welfare. The extent to which net benefits fall short of their potential is called deadweight loss    . Deadweight loss can exist when not enough of a good is produced, or too much of a good is produced, or production is not done in the most cost-effective    (least expensive) way possible, where costs include environmental damages. Some types of market failures (and thus deadweight loss) are extremely common in environmental settings.


In a market economy, people and companies make choices to balance the costs and benefits that accrue to them. That behavior can sometimes yield outcomes that maximize total social welfare even if individual agents are only seeking to maximize their own personal well-being, because self-interested trades lead the market to settle where aggregate marginal benefits equal aggregate marginal costs and thus total net benefits are maximized.

However, people and companies do not always bear the full costs and benefits associated with the actions they take. When this is true economists say there are externalities, and individual actions do not typically yield efficient outcomes.

A negative externality    is a cost associated with an action that is not borne by the person who chooses to take that action. For example, if a student cheats on an exam, that student might get a higher grade. However, if the class is graded on a curve, all the other students will get lower grades. And if the professor learns that cheating happened, she might take steps to prevent cheating on the next exam that make the testing environment more unpleasant for all the students (no calculators allowed, no bathroom breaks, id checks, etc.). Negative externalities are rampant in environmental settings:

  • Companies that spill oil into the ocean do not bear the full costs of the resulting harm to the marine environment, which include everything from degraded commercial fisheries to reduced endangered sea turtle populations).
  • Commuters generate emissions of air pollution, which lowers the ambient quality of the air in areas they pass through and causes health problems for other people.
  • Developers who build houses in bucolic exurban settings cause habitat fragmentation and biodiversity loss, inflicting a cost on the public at large.

A NASA photograph of the atmosphere
Negative Externality: Smog A NASA photograph of the atmosphere over upstate New York, with Lake Eire (top) and Lake Ontario (bottom) featured. Both natural, white clouds and man-made smog (grey clouds below) are visible. The smog is an example of a negative externality, as the cost of the pollution is borne by everyone in the region, not just by the producers. Source: Image Science and Analysis Laboratory, NASA-Johnson Space Center

In situations where an action or good has a negative externality, the private marginal cost that shapes the behavior of an agent is lower than the marginal cost to society as a whole, which includes the private marginal cost and the external environmental marginal cost. The efficient outcome would be where the social marginal cost equals the social marginal benefit (labeled Q efficient in Figure Inefficiency from Negative Externality ). Unfortunately, the free-market outcome (labeled Q market in Figure Inefficiency from Negative Externality ) will tend to have more of the good or activity than is socially optimal because the agents are not paying attention to all the costs. Too much oil will be shipped, and with insufficient care; people will drive too many miles on their daily commutes; developers will build too many new homes in sensitive habitats. Thus, there is deadweight loss (the shaded triangle in the figure); the marginal social cost associated with units in excess of the social optimum is greater than the marginal benefit society gets from those units. Public policy that reduces the amount of the harmful good or activity could make society as a whole better off.

Questions & Answers

where we get a research paper on Nano chemistry....?
Maira Reply
nanopartical of organic/inorganic / physical chemistry , pdf / thesis / review
what are the products of Nano chemistry?
Maira Reply
There are lots of products of nano chemistry... Like nano coatings.....carbon fiber.. And lots of others..
Even nanotechnology is pretty much all about chemistry... Its the chemistry on quantum or atomic level
no nanotechnology is also a part of physics and maths it requires angle formulas and some pressure regarding concepts
Preparation and Applications of Nanomaterial for Drug Delivery
Hafiz Reply
Application of nanotechnology in medicine
what is variations in raman spectra for nanomaterials
Jyoti Reply
ya I also want to know the raman spectra
I only see partial conversation and what's the question here!
Crow Reply
what about nanotechnology for water purification
RAW Reply
please someone correct me if I'm wrong but I think one can use nanoparticles, specially silver nanoparticles for water treatment.
yes that's correct
I think
Nasa has use it in the 60's, copper as water purification in the moon travel.
nanocopper obvius
what is the stm
Brian Reply
is there industrial application of fullrenes. What is the method to prepare fullrene on large scale.?
industrial application...? mmm I think on the medical side as drug carrier, but you should go deeper on your research, I may be wrong
How we are making nano material?
what is a peer
What is meant by 'nano scale'?
What is STMs full form?
scanning tunneling microscope
how nano science is used for hydrophobicity
Do u think that Graphene and Fullrene fiber can be used to make Air Plane body structure the lightest and strongest. Rafiq
what is differents between GO and RGO?
what is simplest way to understand the applications of nano robots used to detect the cancer affected cell of human body.? How this robot is carried to required site of body cell.? what will be the carrier material and how can be detected that correct delivery of drug is done Rafiq
analytical skills graphene is prepared to kill any type viruses .
Any one who tell me about Preparation and application of Nanomaterial for drug Delivery
what is Nano technology ?
Bob Reply
write examples of Nano molecule?
The nanotechnology is as new science, to scale nanometric
nanotechnology is the study, desing, synthesis, manipulation and application of materials and functional systems through control of matter at nanoscale
Is there any normative that regulates the use of silver nanoparticles?
Damian Reply
what king of growth are you checking .?
What fields keep nano created devices from performing or assimulating ? Magnetic fields ? Are do they assimilate ?
Stoney Reply
why we need to study biomolecules, molecular biology in nanotechnology?
Adin Reply
yes I'm doing my masters in nanotechnology, we are being studying all these domains as well..
what school?
biomolecules are e building blocks of every organics and inorganic materials.
how did you get the value of 2000N.What calculations are needed to arrive at it
Smarajit Reply
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Source:  OpenStax, Sustainability: a comprehensive foundation. OpenStax CNX. Nov 11, 2013 Download for free at http://legacy.cnx.org/content/col11325/1.43
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