Microeconomics
21st Edition
ISBN: 9781259915727
Author: Campbell R. McConnell, Stanley L. Brue, Sean Masaki Flynn Dr.
Publisher: McGraw-Hill Education
expand_more
expand_more
format_list_bulleted
Question
Chapter 4, Problem 1DQ
To determine
Market failure.
Expert Solution & Answer
Explanation of Solution
Market failure can be caused by Externality and Market Power. Externality is when one person actions affect the whole economy. Market Power is when a small group of people have a strong impact on the economy.
A public good is one where consumption in non-excludable and non-rival. Private goods are not profitable because of the free rider problem. If any person desires to start out fireworks and put a charge for the event, the chances of making any good revenue would become dim. In the event of fireworks, one cannot restrict the people outside the event from watching the fireworks as it is non-excludable and it is an example of non-rival because fireworks is visible to everyone. Hence, If 1 person has seen the fireworks; it will not decrease the ability of someone else to see the same fireworks. This is the first type of market failure.
The 2nd potential market failure can be explained as the existence of an externality. Externalities happen when the profit gets accumulated to someone else rather than the original buyer or seller. For example, a person might completely internalize the cost that is incurred by smoking cigarettes, which are the price and the health issues that the person has to face; but the same person cannot internalize the harmful health issues that could harm others, who inhale the smoke from the cigarette.
1st case: Yes, it is possible for both to occur if an individual feels that the good has a value, such as fireworks, though they still face free-rider issues. For example, a person would like to start a fireworks event and set a charge to see if the event can be made a better show. But as majorities are free-riding from the person’s display, he would start only a small one. If the fireworks display started by that person causes pollution or harm others, then a negative externality might exist.
2nd case: No, since there is a problem of free-rider organizations that would not be producing any goods. As there are no commodities being produced or consumed, externality factor cannot be considered.
Economics Concept Introduction
Concept introduction:
Market failure: It is a condition, where free markets fail to distribute resources efficiently.
Public goods: Public goods are the goods that have the characteristics of non-rivalry in nature and non-excludability. One person’s consumption should not reduce the availability for other person. It is not advisable to restrict other people to avail the goods they desire.
Externality: Externality refers to the spill over of benefits or cost to the third party other than the immediate market participants.
Want to see more full solutions like this?
Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
10:34 O
35 O
Vo)
Y 4G+ l O 47%
kB/s
< Case Study 2.pdf
Gillespie: Business Economics 2e
Chapter 03
Additional case study: Government intervention
In Germany in 2009 there was considerable debate about the extent to which the
government should be intervening in the economy. For example, its citizens were worried
about the future of Opel, a German car brand that was part of the ailing General Motors.
Some wanted the government to make sure jobs were saved no matter what. Others,
however, were more hesitant and worried about becoming the government becoming too
interventionist. Traditionally since the Second World War the German government has
seen itself as a referee in market issues and has avoided trying to control parts of the
economy. It would regulate anti-competitive behaviour, for example, but not try to run
many industries. However in the recession of 2009 when the economy was shrinking the
government was forced to spend more to stimulate demand and had to intervene heavily
to…
Supposeg1increases, but stillc1+b1+g1<1. Using a graph of the goods market, show how we would represent an increase in the value ofg1on equilibrium output y. Be sure to label all axes, curves, and equilibrium points.
Suppose instead,c1+b1+g1= 0. Is the equilibrium in the goods market still possible? If so, what is the equilibrium output? You must explain your answer to receive full credit.
3. Voluntary contributions toward a public goodLarry and Raphael are considering contributing toward the creation of a public park. Each can choose whether to contribute $400 to the public park or to keep that $400 for a new suit.Since a public park is a public good, both Larry and Raphael will benefit from any contributions made by the other person. Specifically, every dollar that either one of them contributes will bring each of them $0.80 of benefit. For example, if both Larry and Raphael choose to contribute, then a total of $800 would be contributed to the public park. So, Larry and Raphael would each receive $640 of benefit from the public park, and their combined benefit would be $1,280. This is shown in the upper left cell of the first table.Since a new suit is a private good, if Larry chooses to spend $400 on a new suit, Larry would get $400 of benefit from the new suit and Raphael wouldn't receive any benefit from Larry's choice. If Larry still spends $400 on a new suit and…
Chapter 4 Solutions
Microeconomics
Ch. 4.A - Prob. 1ADQCh. 4.A - Prob. 2ADQCh. 4.A - Prob. 3ADQCh. 4.A - Prob. 1ARQCh. 4.A - Prob. 2ARQCh. 4.A - Prob. 3ARQCh. 4.A - Prob. 1APCh. 4 - Prob. 1DQCh. 4 - Prob. 2DQCh. 4 - Prob. 3DQ
Ch. 4 - Prob. 4DQCh. 4 - Prob. 5DQCh. 4 - Prob. 6DQCh. 4 - Prob. 7DQCh. 4 - Prob. 8DQCh. 4 - Prob. 9DQCh. 4 - Prob. 1RQCh. 4 - Prob. 2RQCh. 4 - Prob. 3RQCh. 4 - Prob. 4RQCh. 4 - Prob. 5RQCh. 4 - Prob. 6RQCh. 4 - Prob. 7RQCh. 4 - Prob. 1PCh. 4 - Prob. 2PCh. 4 - Prob. 3PCh. 4 - Prob. 4PCh. 4 - Prob. 5PCh. 4 - Prob. 6PCh. 4 - Prob. 7P
Knowledge Booster
Similar questions
- "Any social planner who implements efficient outcomes will produce the same output in a given market as the competitive market would." In addition to the conditions of the first welfare theorem, which of the following have to hold in order for the statement in quotes to be true? O a. Consumer tastes are quasilinear. O b. Consumer tastes are homothetic. O c. Production frontiers are homothetic. O d.Both (a) and (c). O e. Both (b) and (c). Of. None of the above.arrow_forwardSuppose a consumer values a Red Sox - Yankees playoff ticket at $150, and the seller is unwilling to sell the ticket for less than $200. What price will lead to an efficient transaction between the potential buyer and seller? any price greater than $200 O any price greater than or equal to $150 and less than or equal to $200 a price of $0 O any price greater than $0 and less than $150 No price will lead to an efficient transaction.arrow_forwardConsider an economy which is in general equilibrium. Ann and Bob are (the only) two consumers in an economy. They both consume both good and good X . This implies that O d. Both statements are false. y. mu X mu y (i) The equality is important with regards to efficiency because it implies that there are no Pareto Improving trades of x and y between Ann and Bob. (ii) The equality is important with regards to efficiency because it implies that (for x and y) the prices that producers see reflect the (relative) values that consumers place on the goods. O a. Only statement (ii) is true. O b. Only statement (i) is true. O c. Both statements are true. mu mu B X B y Consider the truth of the following two statements:arrow_forward
- ADVANCED ANALYSIS Assume the following values for the diagrams below: Q1 = 16 bags. Q2 = 11 bags. Q3 = 23 bags. The market equilibrium price is $53 per bag. The price at point a is $85 per bag. The price at point c is $5 per bag. The price at point d is $63 per bag. The price at point e is $38 per bag. The price at point f is $74 per bag. The price at point g is $39 per bag. Apply the formula for the area of a triangle (Area = ½ × Base × Height) to answer the following questions. a. What is the dollar value of the total surplus (= producer surplus + consumer surplus) when the allocatively efficient output level is produced? $ What is the dollar value of the consumer surplus at that output level? $ b.What is the dollar value of the deadweight loss when output level Q2 is produced? $ What is the total surplus when output level Q2 is produced? $ c.What is the dollar value of the deadweight loss when output level Q3 is produced? $ What is…arrow_forward8. Q Explain what is meant by the term “market failure" by giving two major types of such failures. A (Market failure) is a situation where the competitive market system on its own would either (1) produce the "wrong" amount of certain goods and services as is the case where there are external costs or benefits (i.e., externalities), or (2) fail to allocate any resources to the production of certain goods and services referred to as "( public goods )". 9. ) Refer to the question 8 above and explain the reasons behind each type of failure. Where negative externalities exist, the market system without any intervention will allow some of the costs of private production or consumption to "spill over" onto third parties. There is no market incentive to absorb all of the costs of production if there is a way to get someone else to pay for them. • In such cases of negative externalities, the market cost and price of the product will be too (low high) and thus the quantity produced too ( low ,…arrow_forwardConsider the town of Springfield with only three residents, Sophia, Amber, and Cedric. The three residents are trying to determine how large, in acres, they should build the public park. The following table shows each resident's willingness to pay for each acre of the park. Acres 1 2 3 4 5 6 7 Sophia 0 acres O1 acre 2 acres 10 8 6 3 1 O3 acres 0 Willingness to Pay (Dollars) Amber Refer to Table 11-1. Suppose the cost to build the park is $24 per acre and that the residents have agreed to split the cost of building the park equally. If the residents vote to determine the size of park to build, basing their decision solely on their own willingness to pay (and trying to maximize their own surplus), what is the largest park size for which the majority of residents would vote "yes?" 24 18 14 8 6 4 2 Cedric 6 5 4 3 2 1 0arrow_forward
- Suppose the equation for the demand curve in a market is P=100 – 2Q. Also, suppose the equation for the supply curve in the same market is P=10+3Q. Suppose there is an external cost of $20 associated with the production of each unit of the good. The socially optimal quantity is O 4 units smaller than the market equilibrium quantity. O 22 units greater than the market equilibrium quantity O 14 units smaller than the market equilibrium quantity O 4 units greater than the market equilibrium quantity.arrow_forwardEvaluate the following two statements: (i) General equilibrium does NOT guarantee efficiency if firms have market power. (ii) General equilibrium does NOT guarantee efficiency if producing output creates a negative externality O a. Neither (i) nor (ii) is true. O b. Both (i) and (ii) are true. O c. Only (i) is true. O d. Only (ii) is true.arrow_forwardPRICE (Dollars per unit of electric cars) 500 450 400 350 300 250 200 150 100 50 0 H 0 O □ 1 0 ■ The market equilibrium quantity is O 3 5 QUANTITY (Units of electric cars) ☐ Supply (Private Cost) 6 Demand (Private Value) Social Cost units of electric cars, but the socially optimal quantity of electric car production is To create an incentive for the firm to produce the socially optimal quantity of electric cars, the government could impose a per unit of electric cars. units. of 1arrow_forward
- The many identical residents of some cities love drinking apple juice. The cost of producing a bottle of apple juice is $5, and the competitive suppliers sell it at this price. Each resident has the following willingness to pay for the tasty refreshment: Quantity Willingness to Pay (Dollars) First bottle 10 Second bottle 8 Third bottle 6. Fourth bottle 4 Fifth bottle 2 Further bottlesarrow_forwardThere are three buyers, A. B, and c. When the price is P = $2, A buys 2 units, B buys 1 unit, and C buys O units. Now we offer the same good at P = $1 to these three buyers but restrict the quantity they can buy to one unit per person, and all three Individuals buy one unit each. We can conclude that O A's consumer surplus is higher in the second case. O the total consumer surplus is higher in the second case. O B's and C's consumer surplus is higher in the second case. O All of the above. O There is not enough information to answer this question.arrow_forwardADVANCED ANALYSIS Assume the following values for the diagrams below: Q = 12 bags. Q2 = 7 bags. Q3 = 19 bags. The market equilibrium price is $46 per bag. The price at point a is $70 per bag. The price at point c is $10 per bag. The price at point d is $56 per bag. The price at point e is $31 per bag. The price at point fis $67 per bag. The price at point gis $32 per bag. Apply the formula for the area of a triangle (Area = ½ x Base x Height) to answer the following questions. %3D %3D (a) (b)arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
