Business Essays - Business Analysis

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Business Analysis

Explain the concept of externalities and use it to show why market failure might occur. Using one example show how governments might approach the problem and evaluate the policy alternatives.

Information that is going to be discussed is about why market failures occur. Vital point that will be talked about is how the government would approach the problem of congestion and how the government would come up with solution.

&lsquo;&rsquo;An externality is a side effect of economic activity that affects people or companies not directly involved in that activity.&rsquo;&rsquo;(Beardshaw 2001 pg 181) However, Beardshaw states that the importance of this concept can be explained with environmental problems that occur. There are varieties of environmental problems such as global warming, weather and pollution.

Global Warming

&lsquo;&rsquo; [Global warming occurs when the heat of earth, which had been] traced to increased production of carbon dioxide.&rsquo;&rsquo; (Beardshaw 2001 pg 181)Beardshaw is stating that every time we burn fossil fuels such as petrol, oil, gas, and coal we are causing a problem. The problem is occurred by transport and gas and electricity industries.


There are many examples that can be given about weather. An example that&rsquo;s going to be given is about the acid rain. Acid rain results from burning sulphur or nitrogen oxides, which turns into acids. When the acid is in contact with the water in the atmosphere, the acid will dilute into a form of rainfall that which will affect the tree growth rates, agricultural productivity, paint, metal and stone work.

Air pollution

Air pollution builds up a number of gases. The other problems that occur are from [carbon monoxide (CO), nitrous-oxide (NO), volatile organic compounds like benzene (VOCs), particulate matter which are tiny specks of carbon (PM)]. (Beardshaw 2001 pg 183) Beardshaw states that these problems originate mainly from fossil fuels burning transport, and industries are to blame. The major issue of air pollution will be with people with lung conditions and asthma sufferers.

There are many reasons why market failure occurs. One reason is due to the existence of externalities. The existence of externalities is claimed that the market will provide too much or too little of a particular good, and that the government must step in and use taxes, subsidies, restrictions on the provision of the good.

An externality is a cost or a benefit that will be imposed on people other than those who purchase or sell a good or a service. &lsquo;&rsquo;Economist have described that externalities are common in virtually every area of economic activity.&rsquo;&rsquo; (Anderton 2000 pg 120) However this states there are many ways that externality can be described such as an example will be spill over affects. An example would be a chemical plant may dump waste into a river in order to minimise its cost. Further down the river, a water company has to treat the water to remove dangerous chemicals before supplying drinking water to its customer. The customers would have to pay higher prices because of the pollution problem.

There are other reasons why market failure occurs such as the market providing too many goods that produce negative externalities and too few goods that create positive externalities. &lsquo;&rsquo;Too many goods that create negative external affects will supposedly produced because of the costs that will be imposed on those who experience the negative externalities that are not taken into account of the production of the goods creating negative affects.&rsquo;&rsquo; (Anderton 2000 pg 121). Therefore this means that the costs are assigned on people who don&rsquo;t buy or sell goods. If these cost were accounted for in the production of such goods, as the cost of producing these will be higher and thus fewer of them would be produced and purchased.

An example of a good could be such as steel. If steel manufactures were required to compensate individuals whose curtains became dirty, the cost of negative externalities would be included in production of steel and would raise the cost of producing steel. (Parkin 1997 pg110) Therefore this would cause the profitability of producing steel to decrease, decrease the supply of steel, and decrease the quantity of steel demanded as the price rose to the additional cost. This means that it would decrease the total production and purchases of steel to a level that will allegedly takes in to accountant the effect of pollution.

Traffic Congestion

Traffic congestion is a problem that all countries face, such as large cities like London, Leeds and many other cities. Having traffic jams its frustrating for people and also its time wasting. There are problems with congestion such as more people getting into accidents and also people getting to work late. These are the main problems of congestion as stated above. The three main areas of congestions are on roads, motorways, and towns. There are varieties of ways that the government might approach the problem and many different ways of solutions.

Government policy on congestion suggest they want more people to use the public transport rather than using their own cars to travel to work or even just going out.

There are varieties of different articles with different methods of solutions to decrease congestion.

The Times Online newspaper has suggested opening the hard shoulders lanes to ease the jams. In this article it mentions that this scheme has been tested at Birmingham, as ministers have said it has been successful. &lsquo;&rsquo; The move will help to speed up traffic at a fraction of the costs building extra lanes.&rsquo;&rsquo;(Swinton times online Pg 6 2007) Steven Swinton times online article show that the government will be saving money as not building extra lanes as a high cost for the government as the cost been shown on times online article. The ministers are happy with the hard shoulder land solution is working as they have planned. Results have been showing that journey times at most congested periods were reduced by 16% as more than 700 cars an hour switched to the hard shoulder. &lsquo;&rsquo;A survey was also done that suggests 1,200 motorist also proved encouraging. 93% of people said they found instructions about when to use the hard shoulder clear, which 60% said they thought the scheme should be implemented else&rsquo;s where on the motorway network.&rsquo;&rsquo; (Swinton times online Pg6 2007) Swinton is stating most people are absolutely fine with the hard shoulder strategy that has decreased traffic jams and less congestion and some people disagree with this solution.

Another example could be is if the government want to extra lane on motorways to reduce congestion as this would be a problem for the government. By increasing the amount of road space will encourage more people to use cars. This is showing that the government will not overcome the problem of congestion but make it worse. &lsquo;&rsquo;A good is example is the London orbit motorway, the M25. (Sloman 2000 pg 343) Solman is stating that the government have made a mistake of underestimating as how many people would use the motorway rather than using an alternative route. Government had made a big mistake as it has shown on the M25 motorway is been used by more motorists rather than people using other public transport. This is showing that the motorways will be seriously congested and the government will be under pressure to build additional lanes.

The Green party would like more people to use the public transport rather than using their as to being stuck in traffic jams and as to solve the problem of congestion. Green party had in mind is in ten years times to build light rail way system in eight cities, create 10,000 people friendly homes zones, put &pound;4 billion into cutting train and bus fares, &pound;1 billion into rural transport and another billion into transport for disabled people. (Killock Green party pg 7) This shows the party is thinking about the long term affects about congestions and how it could massively improve by having less people on the road. The major issue the party is thinking about is saving people lives rather than people getting into accidents. Another issue the party wants Britain to get moving again and also suggesting by having less congestion and having more people on public transport would mean less damage to the environment. These are two points that the green party are considering and to being important for Britain.

There are many different solutions to sort the congestion problems out. One of the ways is to extend existing taxes. The government can increase the price of fuel as they are many advantages for the government as the polluter will be paying directly, its easy to implement and the benefit for the government will be getting more revenue off people and spending it elsewhere. The only disadvantage is the price of fuel is already high. Another way of having less cars running on the road to decrease the congestion is by rising the driving age. The advantages of this it&rsquo;s simple to do because they are no costs that are involved in the preparation and is very easy to control and monitor. The disadvantages of this is the government getting less money coming in and also government are punish some people who are not responsible of congestion. They is another ways that congestion can decreases as talked about in the BBC news article stating that Hughes will stop road toll at 5pm. (Simon pg 8-9)The liberal democrat MP has outlined that he has planned to charge &pound;5 in central London road which operates between 7am and 6.30pm. He would also offer drivers five free journeys a year with in the zone. This is the Mp advice that he thinks that road congestion would decrease with charging people. The Green party plans are very similar to MP. Green party leader has said they should charge money on the type of vehicle they would have as an example; larger vehicle engines charged &pound;10, Lorries charged &pound;15 and motorbikes pay &pound;2.50.

Above the information has shown they are many different solutions to solve the problems of congested. I have talked about the advantages and disadvantages of the solution to solve the congested problem. The vital point that was discussed is why market failure occurs. It is very unlikely any of the policy can provide the complete solution. Certain policies are better suited to some situations than others. Government will need to learn from experiences both within their own country and in other and in order to find a solution to each specific problem.


Anderton, Alan, (2000) Economics Third Edition, causeway press, Lancashire

Beradshaw John (2001) Economics A Student Guide, Prentice Hall, Harlow Essex

Sloman John (2000) Economics, Fourth edition, Prentice Hall, Harlow Essex

Parkin Michael (1997) Microeconomics third edition Addison Wesley, London


Steven swinford (2007) TIMES ONLINE Opening of hard shoulder to ease jams from Sunday times, 30/3/2007

Jim killock (2006) The Green Party Reliable, Inclusive Transport 30/03/2007

Author unknown (2004) BBC NEWS Hughes will stop road toll at 5pm, 30/3/02007

Bob Walker (2007) RADIO 4 Jam today and jam tomorrow 30/3/2007

Author unknown (2004) BBC NEWS Congestion charging 'a success' 30/03/2007