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An analysis of positive and negative externalities show that in the free market, there is not an equal allocation of resources that managers and societies would want (Gillespie, 2013: 306). “Market failure happens when the price mechanism fails to allocate scarce resources efficiently or when the operation of market forces lead to a net social welfare loss” (Riley, 2018). Nevertheless, there are several varieties that can cause a market failure such as externalities, monopoly power, and public goods. Negative externalities arise when the impact of an action is conflicting towards bystander (Mankiw, 2015). Throughout this essay, I will thoroughly explain with recent articles why negative externalities are a form of market failure. Then through graphs, I will indicate the welfare loss that results from it and finally argue how the government could address them.

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“A negative externality is a cost that is suffered by a third party as a result of an economic transaction”. This is a market failure because the market does not achieve social efficiency. That spillover effects could affect any party such as building or neighbourhood but there exist 2 types of negative externality; of consumption and of production.

A research article from the UC Davis Institute of Transportation Studies highlighted how the population within big cities in America have been using less public transportation and more ride-hailing services in the past two years (McFarland, 2018). The analyst is scared that if people keep using ride-hailing services, there will be tension in areas that are near capacity. By using more applications such as Uber and Lyft, the negative externality of consumption, road congestion, is formed because it produces time loss(monetary business cost), the frustration of drivers(health issues) and most importantly air pollution. 

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