If, after careful analysis, an economist concludes that there has been a market failure, which of the following possible corrective actions might the economist favor? Why?
a. prohibiting the activity
b. charging fees for continuing the activity
c. requiring that the public be informed of the activity
d. government purchase of the item for the public
Any corrective measure should, as much as possible, be marketlike in nature.
a. This is not generally appropriate because it does not rely on a price mechanism to bring about change.
b. If the activity generates detrimental externalities, a fee would be appropriate in order to bring marginal private cost toward marginal social cost.
c. If the activity involves asymmetric information, the requirement to inform may improve a person's abilities to make an informed choice.
d. If the item is a public good, government purchase may be appropriate. However, in other cases, government purchase is not generally a useful corrective to market failure.
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In long-run equilibrium, a competitive firm can earn zero profit only if its technology exhibits
a. increasing returns to scale. b. decreasing returns to scale. c. constant returns to scale. d. regressive returns to scale.
Suppose that a worker in Freedonia can produce either 6 units of corn or 2 units of wheat per year, and a worker in Sylvania can produce either 2 units of corn or 6 units of wheat per year. Each nation has 10 workers. Without trade, Freedonia produces and consumes 30 units of corn and 10 units of wheat per year. Sylvania produces and consumes 10 units of corn and 30 units of wheat. Suppose that
trade is then initiated between the two countries, and Freedonia sends 30 units of corn to Sylvania in exchange for 30 units of wheat. Sylvania will now be able to consume a maximum of a. 30 units of corn and 30 units of wheat. b. 40 units of corn and 30 units of wheat. c. 40 units of corn and 20 units of wheat. d. 10 units of corn and 40 units of wheat.
Production is efficient when
A. the economy cannot produce more of one good without giving up the production of another good. B. technological change occurs. C. it generates a point beyond the production possibility curve. D. the maximum amounts of the most important good are produced.
The incentive to cheat within a cartel increases with an increase in the following factors, except:
A. The number of firms in the cartel B. Economic performance and industry sales C. The number of potential entrants into the industry D. The cost-differences among firms