Question

In this discussion, give an example of a market failure in the aviation industry and where the government either (a) stepped in to correct the action and its effects on the market, or (b) when the government did not step in to take corrective action and address the effects on the market.

Answer 1

market failure in the aviation industry can be explained by taking simple example of negative externality. say for example the aviation industry creates negative externality as in air polution in the environment. as we all know possitive as well as negative externalities are sources of market failure. it simply means the market price paid to the industry for there product does nit include the social cost and the market failes to internalise the utility or dis utility. here as we have taken negative externality we will talk about dis utility only. in no government intervention  situation the market price of the product will be low and quantity produced will be higher as the market price for the product is not taking the social marginal cost. when government enters the market to internalise the externality the price will go higher of the product which creates dis utility as the government will impose the tax taking into consideration the social marginal cost of the product . price will go up and quantity produced will come down. this way the externality will be internalised and there will be no market failure.