Market price fails to reflect costs of negative external impacts leading to excessive production and consummation of goods.

In regard to impacts of pollution we may not be able to measure all relevant costs and benefits in economic terms.  A good example is the automobile industry with the enormous cost on pollution and human health that is not part of our economical indicators. Environmental regulations aim to set the optimal level of pollution because corporations do not take responsibility for the marginal social costs. They produce pollution at a level that is scientifically and socially unacceptable and irresponsible in terms of damaged to the environment.


Market externalities must be taking into account, when a company pollutes, it produces a negative externality on the ecosystem, the health of the people, the sack of future generation, and we all are affected negatively by the polluters. To guarantee the future of our planet and our own survival, we need to accept market failure and take into account in our economical approach all negative externalities.  “One approach to pollution control is to internalize external costs by a system of green taxation or other instruments that requires producers and consumers of the polluting good to take these costs into account”.


Reference:
Harris, J. M. (n.d.). Environmental and Natural Resource Economics (Second edition ed.). USA:
Hougthon Mifflin Company. (Original work published 2006)