The Use Of Cars Causes Market Failure Analysis

Register to read the introduction… The use of cars causes negative externalities, due to the smoke it produces from its exhaust pipes. The “consumption” of cars produces several negative externalities. It is possible that negative externalities can arise from traffic congestion, from noise and from pollutants from car exhaust pipes. It could also arise from the road damage faced when cars ploy the roads. Also cars can cause market failure because the demand for them is unlimited but the supply is limited. This therefore presents the creation of a perfect equilibrium.

When people “consume” their cars, the social benefit would be less than the private benefit due to the negative externality of fumes from cars. Society however benefits because there is also positive externality from the consumption of cars. The purchase and use of cars would make public transport less crowded and more comfortable. Also government can benefit from the usage of the funds derived from the taxes imposed on the production of cars. Taxing the production of cars helps to solve the market failure its production creates. It might allow the production firms to finally achieve allocative