EXTERNALITIES AND MARKET FAILURES IN ENVIRONMENTAL CONTEXTS

1 | P a g e

1. Defining Environmental Externalities

1.1 Concept of externalities

Externalities as basic to understanding the effects on the environment of self-generated economic

decisions is crucial. An externality is a situation whereby the bearing of social costs or the

enjoyment of social benefits by one party imposes costs on, or provide benefits to, other people

who are not party to the existing contractual arrangement (Human & Heal, 2020). This leads to a

market failure as otherwise the optimal resource allocation is not achieved through the price

mechanism. An externality could be externally beneficial or externally negative depending on

whether it produces benefits to the third party or imposes costs on the third party. It is important

in environmental economics; pollution is the best example of the negative externality at work.

Toxic release from the factories, impacts health of inhabitants within the vicinity negatively.

These health costs, however, are not incurred by the factory, thus the factory ends up bearing

only their private costs which may not be equal to their social costs (Gillingham & Stock, 2018).

Hence, the specific cost of the factory does not contain the social expense of pollution which

makes this factory overproduce and pollutes more than necessary. This coupled with the fact that

negative externalities are costly in achieving efficient allocation of resources demonstrate how

this situation is suboptimal. On the other hand, Obrázky positive externalities include

externalities that are also beneficial, for example, education or immunization in the society;

meanwhile, due to the lack of information about the impact on the rest of the society, individuals

or firms offering such products or services do not gain the same overall profits, which leads to

underproduction (Human, 2021). For instance, when individuals get vaccinated, not only do they

prevent falling sick, but they also prevent other people from getting sick, this demonstrates the

aspect of utilitarian happiness. But the private benefits of immunization are smaller than total

2 | P a g e

social benefits for the related good of vaccinating Since the full social value of immunization

exceeds the private value, the number of people who actually get vaccinated is less than socially

efficient. Measuring externalities involves intervention to bring the external costs or benefits

within the fold of internalizing a particular activity with an intention of equating the Personal

Benefits to reflect in decision-making with Social Welfare. This alignment can be made through

tools such as taxes, subsidies or, regulation policies among others for the purpose of achieving

the desired goals.

1.2 Types of externalities

Externalities can be categorized into two main types; they include the positive externalities, and

the negative externalities, whereby each of these types has different effects on the society and the

society’s environment. The following are some examples of inefficiencies or Schumpeterian

memorandum: Negative externalities, for example pollution, arise when the nature of providing

or using goods and services is costly to others. For instance, industrialization has contributed to

environmental pollution which is seen in the quality of air and water and leads to health and

environmental problems (Dasgupta, 2021, p. 177). These are social costs that are incurred by the

community and not by those individuals who pollute the environment through excessive

production of hazardous and non-recyclable materials. Lément 2 : Quand les entreprises ou les

acteurs économiques n’assurent pas totalement les coûts générés par leurs actions, ces derniers

contribuent davantage à dégager des dommages que si leurs auteurs en étaient amenés à

supporter la charge. Whereas, positive externalities result in gains to the society, and not directly

to the producers or consumers in the market. An example of the benefits is the planting of trees

that facilitates provision of a better environment as it favors growth and development not only of

the trees themselves but also the surrounding wildlife and offers better aesthetic value. These

3 | P a g e

include enhanced returns or revenues that go beyond the initial planner or instigator of Tree

Planting, in a manner that promotes the overall well-being of society (Barbier, 2020).

Unfortunately, the positive externalities sometimes causes underproduction as the private

beneficiaries of the goods are less than the whole society. Because they do not get to enjoy all

the possible upsides that come with the favorable extra effects they present to society,

individuals and firms might underprovide readily available gains. It can be explained by the

underproduction, which can be reduced with subsidies or incentives promoting the output with

positive externalities. For instance, fossil fuel subsidies increase the adoption of renewable

energy sources, which are eco-friendly and appropriate for the health of people (Human & Jaffe,

2022). The use of renewable sources such as solar and wind power brings additional benefits

since they are not derived from fossils, which in turn minimizes emissions and promotes a

healthier environment and fight against climate change.These externalities make a point that

government policies should be employed to adjust market failures, and public and private goals.

1.3 Environmental implications

Externalities raises aspects of environmental issues and concerns especially for negative

externalities like pollution and deplete of natural resources. This notion of Negative externalities

play a huge role in environ depletion in that they inflict certain costs on the community which do

not reflect in the market price of the goods and services. For instance, the emission of gaseous

substances from industries causes detrimental effects on human health and degrades the quality

of the environment leading to over production and harms that are inflicted on society but not on

the polluters (Boyce, 2018).

Additionally, instances of water pollution through pollutants such as fertilizers discharges from

farms impact the streams, ultimately impacting the lives of people and the environment (Lanz,

4 | P a g e

Dietz, & Swanson, 2018). What is more, if certain practices generate significant external costs,

people in their self-interest do not internalize such costs and thus, come up with the

unsustainable and detrimental to the environment in the long run solution. Companies,

consequently, persist in using natural resources as production inputs without moderation, leading

to depletion and environmental deterioration. Some of the well known activities which involve

negative externalities include the excessive utilization of fossil fuels, deforestation, and use of

greenhouse gasses where external costs lead to serious problems such as climatic change and loss

of diversity. On the other hand, creation of positive externality activities, for instance,

conservation and sustainable agriculture, brings with them some remarkable environmental

impacts. They support #LifeOnEarth, promote the creation of healthy soils, and make

ecosystems less vulnerable to any climatic changes (Human, 2021). organic farming makes

heathily improved natural environments and elastic production systems, so the conservation

accurately preserves endangered species, reconstructs wildlife habitats and keeps up balance of

an ecosystem. These policies, however, are usually under-financed and under-applied because

the market prices do not reflect the full worth of their environmental contents; this is a

manifestation of another characteristic of market imperfection where environmentally friendly

measures are rewarded insufficiently. New policies are important in the internalization of all

positive and negative external in achieving the goal of making the prices reflect the

environmental impacts. Interventions such as carbon prices, pollution taxes, and green

technology subsidies help ensure that business and economic activities become sustainable

(Dasgupta, 2021). Carbon pricing and pollution taxes are essentially designed to ensure that

operations which emit are costly to undertake and conduct to force firms to switch to better

technologies and lower emissions.Therefore, fixing these externalities enables the world guides

5 | P a g e

its inhabitants towards agreeing on a rational policy on the use of natural resources, thereby

safeguarding the environment for future use while at the same time promoting economic

activities.

2. Negative Production Externalities

2.1 Air pollution emissions

Sulfur emissions are a major production external diseconomy, meaning that they convey

negative externalities on the society through environmental and health degradation costs that are

shouldered by the society but borne by the polluters. Some of the major emitters of air pollutants

are industries and transport emitting Air Pollution which comprises of sulfur dioxide nitrogen

oxides and particulate matters. These pollutants have earned recognition due to their capacity to

culminate in severe respiratory illnesses, cardiovascular diseases, and premature death thus

signifying the profound public health importance (Heal, 2020). The Economically damaging

exercises that cause air pollution have a tendency to neglect these social costs into their repaying

costs, resulting in market failure. For example, pollution levels are high when using coal to

generate electricity and this is not reflected in its cost; the cost of generating electricity from coal

does not include the social cost of health to the people exposed to its pollutants or the social cost

of degrading the environment (Boyce, 2018). This gives us the misunderstanding of private costs

and social costs which lead to overproduction of goods and services with high pollution levels.

Higher standards have the potential to lower emissions, and put pressure on industries to use

fewer dirty technologies; this can increase the stringency of the internalization process

(Gillingham and Stock, 2018). Carbon finance that employs market instruments such as carbon

taxes and cap and trade systems offer the incentive of economically costly emissions. These

6 | P a g e

policies put a price on carbon and ensure the polluting firms incur the costs of their actions to

society, hence, promoting sustainability in manufacturing (Hepburn et al. , 2020). Carbon pricing

is to attach a price to carbon and penalize industries for emitting greenhouse gases while the cap-

and-trade measures on emissions cap emissions levels, and allow industries to use emission

permits as commodities that can be traded. These metods build up the economic structure, a

structure which forces authorities and companies to adopt fresh technologies that will not be

hazardous to the environment. Reducing air pollution emissions, therefore, necessitates a

combination of command and Demand-side approaches since these are market failures where the

market fails to provide a solution to the problem of polluting the air. Combining these

approaches will allow the minimizing of emissions, preventing damage to the health of the

population, and encouraging the use of resources and their further distribution to take into

account the cost for the environment.

2.2 Water pollution discharge

Water pollution discharge can be classified as another essential negative production externalities

and the basic idea is that, industries and agriculture pollute water resources that in turn put

negative impacts on people’s health and the environment. Some of the pollutants include heavy

metals, chemicals and organic wastes which are released by factories directly into the water

bodies such as rivers and lakes and in the process affecting the aquatic lives and sources of

drinking water (Dietz & Venmans, 2019). To compound the matter, industrial and agricultural

wastes in form of pesticides and fertilizers further pollute water bodies and leads to

eutrophication and species loss. Some of these pollutants affect water bodies in ways that lead to

oxygen depletion hence affecting fish and other aquatic forms of life besides altering ecosystems.

There is no internal cost for environmental and health depletion hence making it a market failure,

7 | P a g e

whereby prices of goods produced do not depict the actual cost. This social cost for water

pollution deny natural habitats and destroy aquatic life and increased water treatment to ensure it

is safe for human consumption as mentioned in the article by Chichilnisky and Heal (2022). For

example, water that contains such substances as agents of cancer, viruses, and bacteria requires

the use of additional technologies and Increased costs for water treatment and distribution by

public water supply systems. To address this externality, one with considerable legal bearings for

a suitable environment and harsh enforcement techniques are necessary to enforce these

provisions. Echoing requirements and constraints imposed on the owners of the developments

and the industries for limiting the discharge of pollutants and implementing cleaner technologies

can indeed reduce water pollution. For instance, provisions that compel industries to develop and

apply effective treatment systems to their wastewater can go along way in avoiding

environmental degradation. Effluent taxes work by setting a fee on pollutants proportional to the

quantity and toxicity of the latter, thus encouraging the polluters to minimize outputs of such

substances. They are a legal approach that sets a limit to total pollution levels and allow the

trading of emission rights; this makes polluting cheaper than reducing emissions. These policies

put pressure on polluters to bear the cost of their impacts on others thus encouraging more

responsible methods of production (Dietz & Venmans, 2019).

2.3 Solid waste disposal

Societies, individuals, businesses and corporations produce a large amount of solid waste which

is disposed through landfilling dumping, incineration and littering the environment. Inadequate

management and disposal of solid waste release toxic materials into soil and water, contribute to

greenhouse gas emissions, and result in adverse health effects (Lanz et al. , 2018). For example,

the contaminants such as lead, cadmium and mercury in the e-waste can pollute the soil and

8 | P a g e

water thereby having potential adverse effects on human health and the environment. What I

have noted is that the cost of waste management and the environmental damage is not included

in the cost of such products hence the consumers overuse the products without thinking of the

scarce resources that are used in making them. One best example that can illustrate this is the

increased use and consumption of plastics which are now commonly used and disposed in the

market as disposable plastics such as; plastic bags, drinking bottles, cutleries among others,

which have massively contributed to environmental pollution by polluting our seas and affecting

marine life. Marine habitats are harmed as it impacts wildlives through ensnaring, consumed by

marine creatures, and enters the trophic cascade hence causing immense effects on the ecological

structure. It is important to note here that many of the costs of this pollution, like the pollution of

oceans, the direct and indirect consequences of which include the decline in fisheries and a

negative impact on tourism, are borne by other individuals and not the manufacturers and

consumers of the plastic products (Chichilnisky & Heal, 2022). To mitigate this externality, the

appropriate waste management strategies which embrace a holistic approach should be put in

place. These strategies include that of recycling and composting which help reduce on the

amount of waste that ends up in dumpsites, landfill taxes which discourage people from dumping

waste in dumpsites, and the banning/taxing of single use plastics as part of the effort to control

the use of these plastics. Schemes like Extended Producer Responsibility (EPR) by which the

manufacturer is responsible for a product throughout its lifecycle, can help in prompting

improvements towards designing more eco-friendly products or packaging (Dietz & Venmans,

2019). As mentioned above, EPR programmes compel manufacturers and brand owners to

produce products that are easier to reclaim or recycle for use hence decreasing the impact of

wastes on the environment.

9 | P a g e

3. Negative Consumption Externalities

3.1 Congestion and overcrowding

Consumption externalities, especially negative ones, which entail congestion and overcrowding

are troublesome in urban environments especially in areas with congested traffic flow which do

not only reduces the quality of life for citizens but also incurred serious economic costs in terms

of wasted time and pollution. Another area of theory that we need to look at is the theory of

externalities where market prices are seen as not reflecting these costs. Whenever more people

want to drive during rush hours for instance, traffic becomes worse and this will lead to the cases

of ‘tragedy of the commons’ whereby many people acting in their best interest tends to harm the

larger community as a whole (Human, 2021). Also lacks proper pricing mechanisms that can

enable most drivers to pay the actual costs of the trip hence contributing to the congestion of

roads. Ordinary mechanisms of congestion pricing, that imply fees paid for driving through

crowded and oversaturated areas or at certain time periods, can also assist with internalizing such

external cost (Human & Heal, 2020). Citing one common good, congestion pricing can

discourage congestion-inducing driving, encourage the use of other functional transport modes

such as public transit or cycling, and, therefore, contribute to pollution reduction and improved

urban quality of life. Additionally, the increased funding in infrastructure and agreeing with

conscious urban designs that focus on the development of environment-friendly transport

systems will also reduce congestion externalities, as developments will continue to take up less

space than private automobiles (Human & Jaffe, 2022). All of these measures aim not only at the

relief of congestion but also at generation of more friendly, adaptable and efficient cities for the

present and future generations. By adopting these measures as part of the urban transport

policies, cities would be able to properly address the problems relating to congestion and guide

10 | P a g e

residents towards a more convenient, comfortable, safe and healthy life style while at the same

decreasing the social and ecological cost of congestion to a city or country.

3.2 Noise and light pollution

Light and sound pollution are examples of negative consumption externalities which are the

negative effects associated with the use of products on other aspects of society and environment.

Some of the forms of noise pollution include urbanization and industrial activities; while light

pollution can be attributed to widespread outdoor lighting that alters the natural lighting patterns

affecting behavioral patterns of wildlife and humans. Other services associated with noise

pollution, for example, disrupted sleep and hearing impairment, are not accurately captured in

the prevailing market cost frameworks, causing inefficient allocation of resources and reduced

quality of life among those most impacted (Kotchen, 2018). Likewise, light pollution can act as a

form of pollution and affect the natural habitats of animals, artificial light affecting the behavior

of animals at night and lastly, the light pollution can also affect human being by causing

disruption in the biological clock in addition to exposing humans to certain diseases (Human,

2021). Reducing noise and light pollution would therefore need intervention in form of

regulation and involvement of the different communities. Local bylaws may prohibit loud noises

in residential neighborhoods and designate restricted noise zones within the proximity of schools

and hospitals; structural codes may require outdoor lighting protection means that helps in

preventing excessive illumination (Kotchen, 2018). Examples are public education campaigns

which people can use in order to learn how they can minimize their impact on the environment

through practicing low noise and low light intensity.Technology breakthroughs like

soundproofing materials and technologies in energy efficient lighting can be other ways of

11 | P a g e

addressing noise and light pollution challenges while enhancing the sustainability of our current

cities.

3.3 Depletion of resources

The other negative consumption externalities include exploitation of resources since through

consumption procedures, various resources such as the forests, water and minerals are abused.

Extraction and exhaustion results to deforestation of natural resources including coal, timber and

fish hence impacting on ecosystem goods and services provisions. Some of the issues of

sustainable utilisation of common pool resources may often be associated with the tragedy of the

commons where the use of the resources harvested in a way that lacks regard for the

consequences on other users by individuals, firms etc (Human & Heal, 2020). For instance,

pollution normally impacts aquatic food chain and in particular, overexploitation of the marine

ecosystem such as fish and other water creatures incurs losses for fishing peoples’ means and

livelihood. Moreover, deforestation for the purpose of lumber or conversion of land towards

agriculture is problematic for species distribution and detrimental to species richness and climate

in general (Lanz et al. , 2018). Enhancing utility of these resources requires undertaking

measures that would enable resourceful management of natural resources for purposes of

productive and consumptive efficiency. Resource taxes and tradable permits can signal the

appropriate intended consumption of the resources in order to avoid the scarcity and switch to

better substitutes (Human & Jaffe, 2022). Similar to this, traditional legal tools that are aimed at

determining reasonable levels of exploitation, as well as identifying areas that need protection,

can be viewed also as foundational to protection of natural resources and support of ecosystems.

Other needed strategies consist of raising public awareness of environmental issues and

environmental education that will assist in passing on the cultures of protection and sustainable

12 | P a g e

utilization of natural resources among people who will make such decisions individually;

Kotchen, 2018.

4. Positive Production Externalities

4.1 Research and development

Locational production externalities are the opposite of local consumption externalities and within

the broad category can be cited positive production externalities such as research and

development (R&D) since they benefit others other than the individual or organisation that

undertakes them. expenditure on R&D has a direct positive effect on technology advancement,

accumulation of knowledge and economic development being of positive impact to people of

society in general (Human & Jaffe, 2022). However, the economic benefits from R&D activities,

which are an addition to the social profit, are not recognized by private industries to the

appropriate extent, which results in non-optimal levels of investment in research. As it pertains to

this discussion, medical research organizations such as pharmaceutical companies may only

focus on the short-term profitability extraction from their new manufactured drugs disregarding

the longer overarching societal benefits embedded in healthier citizen productivity (Human,

2022). To rectify this state of affairs, government can deploy many levers that make R&D

investment more appealing for assortment of enterprises; grants and subsidies, reductions in the

projected tax charges, and patent protection (Human & Wagner, 2020). This means that

governments should provide funding to companies for carrying out their research and

development activities as this will help in improving upon their knowledge base and by

extension the economy’s developmental process. Therefore, there are benefits that societies can

derive from the way the investment in R&D provides positive social returns when results from

public research institutions, universities, and private enterprises are synergized towards

translating the research outcomes into commercial solutions (Human Jaffe, 2022). Understanding

13 | P a g e

and valuing the various spill-overs implicated with innovation are crucial if societies are to foster

research and development led growth. Through offering encouraging policies to encourage

spending in R&D and promote knowledge shared, this will enable the policymakers to improve

economic growth, enhance competitiveness and meet the societies’ needs. The finding could also

indicate that besides R&D investments, sustainable funding agents and strategic partners could

also enhance the funding of research and development in the long-run hence contributing to the

prosperity and welfare of the society.

4.2 Sustainable production practices

Efficient production is still another example of positive production externalities in which various

production techniques and production processes are implemented through environmentally

friendly approaches for use of natural resources. Such matters contain numerous elements such

as energy conservation activities, waste minimization activities, and utilization of renewable

resources (Human, 2022). Here we find that while the positive effects of undertaking activities

that reflect sustainable production practices are felt by the firm in terms of cost reduction,

environmental gains accrue to the society. For instance, a manufacturing firm that invests in the

efficiency of machines and appliances, saves costs on energy, reduces gas emission, and reduces

the strain on energy resources in the climate change mitigation process (Human and Heal, 2020).

Some of the problems to sustainable development include market imperfections in sharing

information on sustainability as one of main and short-term focus of firms. To deal with these,

the policy makers may use the policy instruments such as environmental standards and eco-

labeling, which in turn may put pressure on the firms to be environment friendly. Also, policy

measures with a financial flavour like subsidies, tax allowances, targets to purchasing

environmentally friendly products and materials can also motivate firms to embracing green

14 | P a g e

innovations and systems (Human & Jaffe, 2022). Through such policy approaches as the

adoption of polluter pay principles, governments ensure that the benefits that result from

sustainable production practices are internalized and businesses are compelled to adopt better

techniques of resource use and production while minimizing environmental impacts. They are

not only advantage for individual firm, but also complicate community interest in achieving

environmental stability or being more robust.

4.3 Environmental conservation efforts

Another form of positive production externalities relates to sustainable production practices

currently evidenced by many firms, which engage in the efficient use of resources and innovative

means of producing their goods with minimal effects on the environment. These practices

include various approaches such as energy efficiency, lowering wastes and the use of renewable

energy (Human, 2022). Though the efficiency gains are realized by firms practicing

sustainability, the incremental improvements in the natural environment are for the common

good. For example, a manufacturing firm that invests in the purchase of an energy-efficient

machine saves on costs of energy and at the same time, diminishes costs associated with

greenhouse gas emissions and the consumption of energy; which is climate change mitigation

effort (Human & Heal, 2020). To the same extent, and because of market imperfections

including information asymmetry and short-term focus, firms may undersupply sustainable

activities. To address these factors, policymakers can establish environmental policies like

environmental regulations and mandatory eco-labeling policies that pressure firms into adopting

sustainable processes (Human & Wagner, 2020). Lastly, the provision of monetary rewards,

which includes subsidies, tax exemptions, or procurement policies that only allow green products

or services, make it easier for companies to incorporate sustainable technologies or practices to

15 | P a g e

their operations (Human & Jaffe, 2022). Through acknowledging the positive externalities of

sustainable production practices, the government enhances the responsibility of firms when it

comes to sustainable production practices hence reducing environmental pollution with an aim of

achieving more efficient use of resources. These measures impacts in the business level for firms

positively.

5. Positive Consumption Externalities

5.1 Ecotourism and recreation

Benefits recipients lovers such as light lovers ecotourism and recreation are social benefits

because they profit those people other than themselves, the society and natural environment.

Tourism that covers responsible travel to the nature areas with the objectives of personal

development, appreciation of nature in its natural state and cultural value of the communities

living in those area has numerous social, economic, and environmental impacts and benefits

(Human, 2021). On the same note, while the tourists participate in unique interactions that

involve exploring ecological sites, the populations in various social settings that engage in

ecotourism activities benefit from employment acquisition, income, and culture conservation

(Barbier, 2020). Furthermore, ecotourism helps in the promotion of the conservation measures

since it increases the awareness of the tourists about the importance of the existence of different

species in the ecosystem, in addition to providing rewards for wildlife preservation (Human &

Heal, 2020). Yet, due to information asymmetry, the comprehensive social benefit derived from

ecotourism may not be accurately reaped by the individual travelers or tour operating companies,

hence they may under-provide towards the optimal sustainable tourism. To intervene this

orientational failure, governments can provide incentives and motivations for the advancement of

ecotourism policies such as vigour for eco-conservative accommodations and revival of

certification courses for sustainable tourisms as well as joining of community-based tourism

16 | P a g e

motions (Human & Jaffe, 2022). Ecotourism and recreation is valued in its potential ability to

generate positive externalities and has to be supported by policymakers strengthening

environmental conservation and people’s well-being today and in the future. Not only do they

encourage thoughtful and moral tourism and improved cross-cultural awareness but they also

preserve the existing resources for nature and help to develop employment in ecotourism

fascination areas. The benefits of ecotourism can be felt across the globe As the international

community identifies and embraces sustainable development for the tourism sector then the

advantages that come with ecotourism will enable the development of stronger, sustainable, and

culturally sensitive tourism economies around the world.

5.2 Environmental education programs

Another type of positive consumption externalities worth exploring is education programs in the

environment which are learning processes that take place in groups, which aims to foster

appreciation and respect for the environment as well as subsequent sensible behavior. These

programs have numerous advantages for environmental education, such as enhancing the

communities environmental understanding, creating environmental knowledge and responsibility

among respondents, and promoting the communities to work together in environmental

conservation (Human & Heal, 2020). In assessing the various advantages that come with

environmental education programs, it is important to note that the general public gets to benefit

from events that enhances environmental outlook (Barbier, 2020). Furthermore, it reveals that

many EEPs promote everyone’s well-being as well as create social capital, community capacity,

and sustainable economic and ecological development by cultivating environmental stewardship

and common norms and beliefs (Human & Jaffe, 2022). However, the gain made in these

programs privilege the environment rather than the individual who participates in the programs

17 | P a g e

hence it is usually observed that there is under investment in the programs designed for

environmental enhancement. As a response to this failure, the government, schools, and civil

non-governmental organizations can partner in establishing policies and relevant programs for

environmental education (Human, 2022). Helping education agencies acquire the necessary

funds, construct and develop suitable curricula, train teachers capable of successfully imparting

these concepts, and oversee public campaigns, policymakers can guarantee that environmental

education is effective throughout the country and has a beneficial influence on the population

and environment of the earth. Promoting the significance of environmental education, this

element of teaching is important. The necessity of sustainable actions and as a part of the

framework for creating a society that will be more protective of the environment in the future, is

crucial.

5.3 Voluntary energy conservation

In another positive consumption externality, people and households living within a country will

avoid the unnecessary use of energy in an attempt to use little energy as would be possible in

order not to harm the environment. Measures like energy conservation education, installing

energy-efficient gadgets, insulating homes, and adopting energy-saving practices by society add

a myriad of social, economical, and environmental values (Human & Heal, 2020). While users

seek benefits like lowered expenditures on power and enhanced criterias, society in general

realizes facilities such as the decreased emission of greenhouse gases, improved energy security,

and overall improved environmental performance (Human & Wagner, 2020). Also, efforts to

reduce energy usage voluntarily support the overall goals on energy usage in the nation as well

as climate change objectives together with transitioning to the low carbon economy (Barbier,

2020). However, the amount of voluntary energy users will to shed can exceed the cost they

18 | P a g e

bear, making society pay more than the user in taking energy conservation measures. Hence,

market failure can be corrected through government interference through policies and programs

aimed at enhancing energy-conserving measures such as energy efficiency standards, financial

encouragement, awareness, and energy saving friendly competitions (Human & Jaffe, 2022).

Voluntary initiatives are cost-efficient tools for achieving energy-saving targets since people are

willing to participate in conservation programmes when rewarded and motivated to do so by

incentives that will bring positive externality for the society and environment, thus translating

into positive social impacts for the energy transition process and climate change mitigation.

Understandably, cultural or structural shifts cannot be abruptly made, hence, embracing the

individual’s role in achieving broader energy and environmental goals is the key to success in

facilitating sustainable change and supporting the development of sustainable aspirations for a

greener world.

6. Market Failure Mechanisms

6.1 Public goods problem

The Public Goods problem is a basic market failure principle resulting from conditions of goods

or services which are non-excludable as well as non-rival, this simply means that the services or

goods may be consumed by everybody and the consumption of the products does not diminish its

availability to others. Common pool resources such as clean air and national defense may be

underprovided because individuals do not have the proper incentives to contribute towards a

good that is feasible to access without contributing, which presents a dilemma of market failure

in providing public goods efficiently to consumers (Human & Heal, 2020). For example, public

good include national parks and conservation where key benefits may be such as recreation and

biodiversity conservation, but it is often hardest fund due to inability of beneficiary to pay for

goods that colleges produce (Human, 2021). To solve this issue, the government action in the

19 | P a g e

form of a public policy or subsidy or in the form of regulation is required. There are two ways

through which governments can fund public goods, and that includes through taxation or

expenditure: this make ensures the government can be able to offer equal and fair access to the

public goods and at the same time make sure that the scarce resources would be well utilized in

the procurement of public goods (Human & Jaffe, 2022). Another way of overcoming barriers on

the provision of public goods is by using collaborative efforts of different stakeholders, for

example through development of public private partnerships or community based approaches

considering their different and complementary skills and resources. Appropriate policies should

be instituted so as to facilitate utilization of public good attributes and hence facilitate provision

of commodities, goods and services for the common good of societies so as to promote economic

and social development. It is therefore critical to comprehend this public goods dilemma and

how it can be dealt with to enhance the general welfare aimed at the realization of sustainable

developmental objectives hence the provision of fundamental resources and services that would

be of universal advantage to all citizens.

6.2 Imperfect information asymmetry

Another mechanism of the market failure is the imperfect information asymmetry referring to a

situation when one actor of the market has less or inferior information than the other actor, which

results in inefficient allocation of the resources in the market. Insurance, health and

environmental sector been some sectors that In situations where there is information asymmetry

the consumer fails to get full and accurate information on the quality and safety of goods or

health and environmental standards of the services provided within the market (Human & Heal,

2020). Thus, consumers may choose something which is not beneficial for them and companies

may act fraudulently or offer services and products that are actually dangerous for an ordinary

20 | P a g e

consumer without punishment. For instance, due to information gaps, consumers are often

reluctant to know of the environmental impact that their purchases have, which results in

excessive use of products that have negative effects on the environment (Human, 2022).

According to the available literature, to reduce the information asymmetry, the policymakers

should set down the appropriate regulations and disclosure requirements that will protect the

consumers. For example, organizations have come up with labeling and certification, which

assists consumers in making decisions regarding the environmental status of products and

services, so that they can make the right choices in going for the environmentally friendly

products, services, etc (Human & Jaffe, 2022). Furthermore, government organizations can use

legal authority to implement rules such as ‘truth in advertising’ and laws to protect customers

from being misled or nakedly deceived and sanction firms that fail to offer correct information

about their products and services (Human & Heal, 2020). Policymakers need to reduce

information asymmetry within the various markets that exist within an economy and bring about

a more efficient economy by protecting the consumers, encouraging the right business behavior,

and leading to a healthy allocation of resources which would lead to stability in the markets and

in turn social wellbeing.

6.3 Lack of property rights