Market Failures

There are various market failures that are important when considering Narragansett Bay and its community. The externalities that we have identified are primarily negative externalities that result from an excess amount of human abuse of the Bay. As stated above, the habitats of Narragansett Bay have been significantly diminished from pollution that has crept into the Bay. The reduction of resources causes depletion in the economic and environmental potential of the Bay.

The failure of the water treatment facility produces negative externalities that affect the entire region. The continuous growth of industrial, commercial, and recreational activity in the region has exceeded the capacity of the hundred-year-old treatment plants. There is a delicate balance in the environment between the amount of pollution it can be healthily absorbed and the amount that disturbs the natural healing processes of the environment. Pollution of this nature produces a situation where marginal damage exceeds marginal benefits.

Polluted water depletes the resources for the commercial shellfish industry in the Bay because they are either killed by the pollution or distorted to the point that they are not acceptable to sell to the general public. Sections of the Bay have been permanently closed for harvesting of shellfish; therefore the people who profit from the shellfish industry suffer from the lack of supply.

The poor public image created by unfavorable circumstances in the Bay creates a negative externality. Recreation and tourism suffer when shell fishing and swimming bans are posted. The Bay supports a 2.5 billion-dollar-a-year tourism industry that consists of marinas, boating, restaurants, and beaches. People are reluctant to partake in the recreational aspects of the Bay because of the negative connotations of pollution. The effect is a reduction in the tourism industry and a struggle for survival for local businesses.

The standard of living for the entire region is hurt by the unwelcome burden of harmful waste. Local residents do not have the satisfaction of knowing that they live near a healthy body of water that they can safely enjoy.

Imperfect competition is also a market failure in Narragansett Bay. The Narragansett Bay Commission (NBC) is the sole provider of wastewater treatment. Private firms are not willing to finance the renovation of the treatment system because there is no economic incentive for firms to enter the industry. With only one supplier of wastewater treatment there is a lack of competition that would apply pressure to find a faster more efficient plan to resolve the problem.

Government failure has been the primary cause for the damage to the Bay as proper funding was not implemented early enough to prevent the initial pollution. The state legislature was aware that the sewage treatment plants were not large enough to properly meet the needs of the growing population in Rhode Island but chose not to upgrade their facilities. The lack of allocated funds has now harmed the Bay to the point where it has become a major issue concerning the state’s interests.

These market failures must be addressed in order to achieve efficiency in Narragansett Bay once again. The Narragansett Bay Commission must make improvements to ensure the Bay continues to be a vital part of the state’s economy.