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Market Failure Research Project: Gasoline Industry

In economic systems, there sometimes emerge situations when the market does not produce an ideal amount of goods or services aligned with the demand, or when the price of these goods or services is different from the expected equilibrium price. These situations are referred to as market failure. The reasons of market failure might be different: social impact and the effect of income inequality, monopolization, public goods and services, externalities and nationalization of some industries (Hirschey 751). In many cases of market failure, the government takes certain actions in order to allow the consumers to get equitable access to these products or services. The purpose of this paper is to consider a sphere where market failure takes place, to analyze the measures undertaken by the government and the effect of these measures, and to discuss the alternatives of government intervention as well as end result of such intervention.

One of the reasons causing market failure are externalities – side effects of production of certain goods or services felt by people who did not personally participate in the market exchange process (Arnold 365). The most striking negative externality is formed by the environmental effects of production such as air pollution, acid rains, deforestation, greenhouse effect, water pollution, disposal of solid waste, etc (Mankiw 195). While there are many consequences of environmental pollution, each of them negatively affects the lives of citizens in neighboring regions or even the lives of all people on the globe. However, it is not possible to eliminate pollution as such, because this would cause manufacturers to stop producing many necessary items. The goal of the government in this case is to find a balance between market interests of the companies (to get maximal revenue) and interests of the society (to reduce pollution as much as possible).

One of the spheres where there’s a visible impact of environmental regulation is gasoline market. There is a variety of regulations associated with gasoline production: some of these regulations define the content of the fuel, others regulate the sales of different gasoline blends in specific regions according to seasonal schedule. There are local regulations controlling the air emissions and waste usage. Overall, there are three levels of regulations for gasoline products: federal, state and local. These regulations affect gasoline prices in several ways. First of all, the costs of production are higher due to the need to comply with a variety of standards. Secondly, these regulations affect the economy of scale and crowd out smaller manufacturers from the market. Thirdly, these regulations create additional entry and exit barriers, and to a certain extent hinder the progress of innovative methods of producing gasoline. Thus, there is a clear evidence of market failure for gasoline market. However, the government is using “mild” methods of intervention based on creating pollution permits which can be then re-distributed by the companies within the industry (Mankiw 211). While this system does not eliminate pollution, its economic consequences are less destructive than the effect of setting strict pollution standards.

In the absence of such government intervention, gasoline prices could be lower, entry and exit barriers would be reduced, and the production of gasoline as well as its consumption would dramatically grow; these processes would result in dramatic environmental changes, rapid growth of pollution and quick exhaustion of natural resources.In this sphere, there are not too many alternatives for government intervention, because economic effects of production and even consumption of gasoline are immediate, while the environmental consequences are a long-term phenomenon and cannot be experienced directly. Some of the possible alternatives are voluntary agreements between companies with regard to environmental impact of gasoline production and the actions of the external parties such as social organizations and ecological initiatives might have a certain effect on gasoline manufacturers and motivate them to raise ecological standards. One more alternative to government intervention can be mass media propagation of eco-friendly products and the increase of demand for products with high environmental standards. However, for gasoline market this method would not be as effective as for beverage or clothes markets because of the low availability of substitutes.

The most prominent era of environmental regulation in the US started in the 1970s, which are called “The Environmental Decade” (Hirschey 756). The end result of government intervention is to achieve the balance between economic development and growth of production volumes and future ecological consequences of these actions. As a result, many companies have improved their production standards and are implementing more effective technologies, which demonstrates the positive effect of government intervention.

Works Cited

Arnold, Roger A. Microeconomics. Cengage Learning, 2010.
Hirschey, Mark. Managerial economics. Cengage Learning, 2008.
Mankiw, Gregory N. Principles of Economics. Cengage Learning, 2011.