What are some of the potential obstacles that can lead to market failure by preventing a market from reaching the efficient outcome? Briefly define each obstacle
What will be an ideal response?
The obstacles basically fall into two camps: Obstacles that occur because the government does not intervene in the market and obstacles that occur because the government does intervene in the market. In the first group are the issues of externalities, public goods and common resources, and monopoly. An externality occurs when a cost or benefit from production falls upon someone other than the producer or when a cost or benefit from consumption falls upon someone other than the demander. A public good is a good or service that can be consumed simultaneously by everyone even if they didn't pay for the good or service. Public goods create the free rider problem, in which people consume the good without paying for it. A common resource is a resource that no one owns but everyone can use. A common resource is over-used. Finally, a monopoly occurs when a single producer controls the market by being the only producer. In the case of an externality, public good, or monopoly, government intervention has the possibility of increasing the market's efficiency.
The second set of obstacles occurs when a market is otherwise efficient but nonetheless the government intervenes in the market. The second group is comprised of price and quantity regulations, as well as taxes and subsidies. Some price regulations make prices higher than a certain price illegal; others make prices lower than a certain price illegal. Both prevent the market from reaching its (efficient) equilibrium. Taxes increase the price paid by the buyer and decrease the price received by the seller. Subsidies have the opposite effect, decreasing the price paid by the buyer and increasing the price received by the seller.
One last reason for a market to be inefficient that does not involve the government is high transactions costs. In this case it might be too expensive to operate a market.
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Each point on a supply curve represents
A) the highest price buyers will pay for the good. B) the lowest price for which a supplier can profitably sell another unit. C) the lowest price buyers will accept per unit of the good. D) the highest price sellers can get for each unit over time.
The tradeoffs between rates of employment and inflation during the 1970s and 1980s forced economists to reassess their earlier beliefs about the Phillips curve to conclude that
a. the Phillips curve was upward sloping, not downward sloping as imagined b. rather than there being one Phillips curve, there is a set of such curves c. the expected trade-offs did not occur, meaning that policy to lower unemployment rates would not cause inflation d. the aggregate supply curve was a horizontal-vertical (two sides of a right angle) curve, as Keynesians believed e. the aggregate supply curve actually sloped downward because price levels fell whenreal GDP rose
Professor's economics students are constructing models for how gasoline prices change. Maria's model has very realistic assumptions and is quite complex. Anna's model is less complicated and less realistic. Maria's model correctly predicts gas price increases 5% of the time. Anna's model predicts correctly 15% of the time. On the basis of usefulness or "goodness," Professor will give which student's model the higher grade and why?
A. Maria's model gets the higher grade because it is more realistic. B. Anna's model gets the higher grade because it predicts accurately more often. C. Maria's model gets the higher grade because it is more complex. D. Anna's model gets the higher grade because it is simpler.
Which of the following statements is TRUE of external costs?
A. There are no good ways to correct for external costs. B. When external costs exist, the price of the good will be deceptively low leading to an overallocation of resources. C. External costs should only be corrected for if the correction will not increase the market price. D. External costs should not be corrected since people will bear the costs whether they are corrected or not.