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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

anyone know any internet site where one can find nanotechnology papers?
Damian Reply
Introduction about quantum dots in nanotechnology
Praveena Reply
what does nano mean?
Anassong Reply
nano basically means 10^(-9). nanometer is a unit to measure length.
do you think it's worthwhile in the long term to study the effects and possibilities of nanotechnology on viral treatment?
Damian Reply
absolutely yes
how to know photocatalytic properties of tio2 nanoparticles...what to do now
Akash Reply
it is a goid question and i want to know the answer as well
characteristics of micro business
for teaching engĺish at school how nano technology help us
Do somebody tell me a best nano engineering book for beginners?
s. Reply
there is no specific books for beginners but there is book called principle of nanotechnology
what is fullerene does it is used to make bukky balls
Devang Reply
are you nano engineer ?
fullerene is a bucky ball aka Carbon 60 molecule. It was name by the architect Fuller. He design the geodesic dome. it resembles a soccer ball.
what is the actual application of fullerenes nowadays?
That is a great question Damian. best way to answer that question is to Google it. there are hundreds of applications for buck minister fullerenes, from medical to aerospace. you can also find plenty of research papers that will give you great detail on the potential applications of fullerenes.
what is the Synthesis, properties,and applications of carbon nano chemistry
Abhijith Reply
Mostly, they use nano carbon for electronics and for materials to be strengthened.
is Bucky paper clear?
carbon nanotubes has various application in fuel cells membrane, current research on cancer drug,and in electronics MEMS and NEMS etc
so some one know about replacing silicon atom with phosphorous in semiconductors device?
s. Reply
Yeah, it is a pain to say the least. You basically have to heat the substarte up to around 1000 degrees celcius then pass phosphene gas over top of it, which is explosive and toxic by the way, under very low pressure.
Do you know which machine is used to that process?
how to fabricate graphene ink ?
for screen printed electrodes ?
What is lattice structure?
s. Reply
of graphene you mean?
or in general
in general
Graphene has a hexagonal structure
On having this app for quite a bit time, Haven't realised there's a chat room in it.
what is biological synthesis of nanoparticles
Sanket Reply
what's the easiest and fastest way to the synthesize AgNP?
Damian Reply
types of nano material
abeetha Reply
I start with an easy one. carbon nanotubes woven into a long filament like a string
many many of nanotubes
what is the k.e before it land
what is the function of carbon nanotubes?
I'm interested in nanotube
what is nanomaterials​ and their applications of sensors.
Ramkumar Reply
how did you get the value of 2000N.What calculations are needed to arrive at it
Smarajit Reply
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in a comparison of the stages of meiosis to the stage of mitosis, which stages are unique to meiosis and which stages have the same event in botg meiosis and mitosis
Leah 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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