Externalities, Market Failure and Environment Protection

As announced in our previous works, this paper is part of a larger research that deals with sustainable development and environment protection in extractive industry. In this respect, this paper is aiming to identify the relationship that may exist between externalities, market failure and measures to be considered for environment protection. In the beginning we conclude our analysis of externalities by discussing the forms they can take in terms of producer-to-consumer relationship. Then we shall move on by explaining that an important result in welfare economics is the second-best theorem by demonstrating that if there are two or more sources of market failure, correcting just one of them (as indicated by the analysis of it as if it were the only source of market failure) will not necessarily improve matters in efficiency terms. In the end, to conclude on the types of inefficiency of resource management, the paper shows that another source of inefficiency in resource use may occur in the government market intervention. As such, we demonstrate that government intervention offers the possibility of realising efficiency gains, by eliminating or mitigating situations of market failure.