Department of Development Studies

Bangladesh University of Professionals

CT 1 & 2: A Case of Market Failure and the Identified Reasons of Market Failure

Course Name: Economics of Institution and Transition

Course Code: BDS-5212

Submitted to: Assistant Professor.Shashish Shami Kamal

Dept. of Development Studies

Faculty of Arts and Social Sciences (FASS)
Bangladesh University of Professionals (BUP)

Submitted by:

Roll no: 2212291010

MSS (2th Semester), Session: 21-22

Dept. of Development Studies
Bangladesh University of Professionals
Date of Submission: 04.12.2022
 A Case of Market Failure and the Identified Reasons of Market Failure

"Market failure" is an economic term applied to a situation where consumer demand does not equal
the amount of a good or service supplied and is, therefore, inefficient. Under some conditions,
government intervention may be indicated in order to improve social welfare. The main types of market
failure include asymmetric information, concentrated market power, public goods, and externalities.
An ineffective distribution of commodities and services on the open market is referred to as "market
failure. The individual incentives for rational behavior do not result in rational outcomes for the
collective in a market failure. Government intervention may be necessary in some instances to increase
social welfare. Multiple factors, including externalities, asymmetric knowledge, the free rider
dilemma, the tragedy of the commons, and monopolies, can lead to market failure. Market failures
have a detrimental effect on the economy since production is dependent on the inefficient use of
resources. When there are market failures, there is no regulation of how much something costs to
produce, which wastes resources. As a result, when there are market failures, inefficient manufacturing
and distribution are prevalent. Market failures are more likely to occur in any economic activity that
is not driven by market forces. When the market does not respond as per demand and supply to
determine the price of the products and services and does not comply with the nine conditions for
competitive markets, we see a market failure situation. Here, I will discuss the negative externalities
of the Turag River.

Here, I will discuss the negative externalities of the Turag River. The River Turag is an upper tributary
of the Turag River that flows alongside Dhaka.The condition of the river is not good during the dry
season. It used to be heavily polluted, and the water appears black in most places with a strong
odor.The river Turag is used to inundate its banks during the rainy season. Though the river is a narrow
one, for this inundation, it looks like a massive river during this time. A lot of fishermen used to catch
fish from this river. But due to the pollution (from industry around us), the count of fish is decreasing
day by day. That’s why those fishermen are struggling these days to make a living and are migrating
into other occupations for a living. In this instance, this is what caused the market to fail. We are aware
that when a thing is produced or consumed, it can have an impact on non-transactional third parties.
Positive or negative externalities are possible. An economic action can have a negative externality
when it has an effect on an unrelated third party. Externalities tend to be entirely negative. Some
negative externalities, such as different types of environmental contamination, are especially harmful
because of their extensive negative effects. A benefit from an economic activity that is felt by an
unconnected third party is referred to as a "positive externality."

The Turag is the most prominent river running through Dhaka. The Turag River is the upper tributary
of the Turag, a major river in Bangladesh. The Turag originates from the Bangshi River, the latter an
important tributary of the Dhaleshwari River, flows through Gazipur and joins the Buriganga at Mirpur
in Dhaka District. The Turag is economically significant to Dhaka.

The waters of the Turag flow alongside Dhaka's industrial suburbs of Tongi, Gazipur, and Savar, all
lined with dyeing and finishing factories. The river was once surrounded by agricultural land, and the
water was used mainly for fishing and transportation. Nowadays, the area is mostly inhabited by people
who directly or indirectly work in the textile industry.The water of the Turag River is so polluted that
it is hindering the preservation of ecology in the capital city. About millions of gallons of raw
wastewater that come from manufacturing houses on a regular basis are being discarded into the rivers
around Dhaka city through almost 185 outlets. Approximately thirteen outlets discharge untreated
industrial wastewater into the Turag and the Balu between Tongi Kamarpara and Isapur during the
Bishwa Ijtema, which is a big religious gathering for Muslim pilgrims coming from all over the world
to stay by the riverside for several days. As proper accommodations and adequate sanitation systems
are greatly lacking,human waste and garbage generated at the site are being disposed into the river. As
a result, river water gets polluted and the ecosystem is negatively impacted.

The presence of municipal waste and nutrients from induced fertilizers from agricultural lands along
the river bank ultimately made the river prone to eutrophication and resulted in the degradation of
water quality as well as the aquatic environment. Pollution is being injected into the food chain as well
as birds, fish, and mammals are found dead due to pollutants. The density of pollutants increases
unexpectedly at the arrival of the lean period as the water level of the river decreases a lot at this time,
but the rate of pollutants released into the river remains unchanged. At this period, pollution becomes
so intense that hardly any hydro-organisms can live through it, and eventually, fish of different species
are found floating dead in the river water. Dead fish and other hydro-organisms further pollute the
water. Through such interventions, the government initiates positive externalities. The cost of
extracting water of a certain quality for the lower riparian state decreases with the increase in discharge
from the upper riparian state. But, the increase in discharge could result in flood damage beyond a
certain level. The negative externality due to pollution caused by any upstream agent to the
downstream agent is considered here. The downstream agent faces an increased cost for extracting
some stated quality of water.

As a river is a public good as well as a common good, it has negative externalities associated with it.
Tragedy of the Commons problems are also here because everyone near the river has had to try to get
their marginal utility. So, the tragedy of the commons occurs here for common resources. It creates
negative externalities as a consequence, creating environmental pollution as well as market failure.
Consequently, these negative externalities continue to be the primary causes of the market failure in
the Turag River.

CT. 02: Possible Solutions and Recommendations for the Identified Problem:

Hazardous industrial wastes in the water have massively hindered the aquatic habitat of the Turag
River. If proper measurements are taken with the help of adequate law the current dumping of solid
waste materials and industrial chemical scan be controlled. Some suggestions are presented which
could prove effective for the long-term restoration process. The propositions include:
• Setting up boundaries along the channel alignment
• Erecting tall fencing to prohibit dumping of any solid wastages and garbage
• Sealing the river bank permanently with pavement slabs
• Dredging of critically narrow and shallow river bed near the Estama Field
• Proper action against land encroachers
• Seal all the pipelines coming from cities/town sewerage and industries
• Implement existing law and regulations
• Removal of illegal residential and industrial buildings from the bank of the river
• Establish an effluent treatment plant (ETP)
• Taxes: One way to deal with externalities is to impose taxes. To lessen the negative effects of
externalities, such as industrial pollution in the Turag River, governments might put taxes on
the goods that cause them. A Pigouvian tax, also referred to as a tax on negative externalities,
has a value equal to its value. This tax is meant to deter actions that have an unrelated third
party paying a net cost as a result. Additionally, the government must step in and take legal
action against anyone who erect constructions on riverbanks without permission.
• Management of Transportation: Another significant use of the Turag in our riverine nation is
transportation to and from the capital. However, a lot of these boats are so old that they
contaminate the river with trash and leak oil. Stricter inspection and enforcement are required
at the policy level to address this, and people must also take action.

I believe that if we can rapidly put these efficient management strategies into place, The Turag
River will be spared. This river has been found to have a considerable capacity for absorbing
pollution, which creates a fantastic opportunity for raising the standard of the water. If the
Turag River is successfully restored, it may provide us a number of advantages, including
boating, fishing, tourism, transportation, power plants, and the chance to take part in a number
of well-liked and intriguing sports.