Market failure is the situation in the market when resources are allocated inefficiently (productive and/or allocative efficiencies are not achieved). Negative externalities, negative effects on the so called 'third party', who are not involved in the process of consumption or production, are an example of market failure.
Increased use of trasport may cause a range of different negative externalities.
The first and the most obvious negative externality is pollution. Exhausted fumes from the cars pollute the air and might even destroy the ozon layer, which will affect the health of many people, who may even live miles away from the transport system. It might also affect the local eco-system and this might have an effect on the local supply of natural resources. Another type of pollution is noise pollution, which may disrupt people and low local labour productivty levels.
An overconsumption of a local infrastucture is another negative externality, because it is likely to lead to an increase in traffic jams in the area. Once again, it will affect people's productivity and, therefore, local companies' production.
All these negative externalities are likely to cause market failure because it is almost impossible to take them all into account and, therefore, include them in the market price. The equality MPC=MSC is not achieved, therefore, the market failure exists.
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