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A market failure is when there are not enough resources that are inefficiently allocated due to imperfections in the market mechanism. When a resource is inefficient it means the resources are not used in the best distribution by firms or organizations. An ETS is executed when the environment has been polluted and the government intervenes in order to control the pollution by providing economic encouragements towards the firms and organizations to reduce the amount of pollution emitted in the environment (Brown* 2001). When ETS is implemented it reduces the pollution of the environment caused by different firms thus making it its main goal. The type of market failure the ETS is addressing is the negative externalities. An externality is…show more content…
This causes an equal amount of harmful amounts being emitted by the firms. A fee or tax that is set on the pollution that a firm or source produces is called pollution charge systems (Pigou 1920). This will cause the charges for marginal cost to increase and supply to decrease. This will cause the consumer or producer to focus on the externalities thereby improving the price mechanism of the failure. When the consumers or producers of the goods or services pay for part of the negative externality that they have caused towards the third party; the private cost increases thus turning the whole situation into an allocative efficient economy. An example of a pollution charge is the deposit refund where an individual buys a product that can cause harm to the environment and gets a refund when the individual has recycled or disposed the product to an approved center. A tradable permit is when the firm or organisation avoids the problem by reaching the same cost minimizing allocation of control burden as a charge system (Crocker 1966). Firms that reach this target can be able to offset excess emissions in other parts of their facilities or sell their surplus permits to other firms. When the government authorities remove existing explicit or implicit barriers to the market activity is called a market barrier. Barrier reduction, liability rule and information

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