“Most of the problems related to the environment and natural resources arise due to market failure, therefore the resolution of these problems could be easily achieved through adequate extension of markets". Critically evaluate this statement with reference to specific examples of pollution, natural resources, and environmental public goods. The market represents a decentralized exchange mechanism that allows society to allocate resources efficiently. (National Oceanic and Atmospheric Administration, 2011) An example of a perfect market for supply and demand for oysters is shown in Figure 1. Assuming the full cost is captured, the equilibrium point b will result in a Pareto optimal outcome , efficiently allocating resources and maximizing economic benefits for society. (National Oceanic and Atmospheric Administration, 2011) Markets fail when they fail to protect the environment from which their resources come. All the social costs linked to the exploitation of a natural resource are not taken into consideration, resulting in an inefficient use of resources. There are three factors that contribute to market failures. The first factor of market failure is that the market is not purely competitive. Secondly, the resource is a common property or an open access resource and finally, when externalities are present. A monopoly occurs when the market for a resource is not purely competitive. In contrast, when pure competition exists, firms can purchase all required units of resources at the market price. However, in the case of a monopoly, firms pay more to acquire resources. As shown in Figure 2, the equilibrium price is increased because the parent firm wants to maximize its profits. Figu...... half of the sheet ...... together. Therefore, in order to combat environmental externalities and other forms of market failure, government agencies must intervene using solutions such as permits and taxes to correct these market imperfections and protect the environment. Works Cited Tony Prato 1998, Natural Resource and Environmental Economics, Iowa State University Press, IowaGeoff Riley, Microeconomics – Externalities Overview, 2006. Available from: http://tutor2u.net/economics/revision-notes/a2-micro-externalities- overview.htmlNational Oceanic and Atmospheric Administration 2011, Environmental Economics, available from: http://www.csc.noaa.gov/coastal/economics/index.htmD.C.Macmillan 2000, "An Economic Case for Land Reform" Politics on land use, vol. 17 n.1, pp 49-57. Available from: Sciencedirect. [April 13 2011].