chapter 9 market failures (perfect competition)

Question 1

benefits of perfect competition

Answer 1

1. technological improvement
2. allocative and productive efficiency
3. economies of scale (decreases price in long run)
4. long run equilibrium
5. max economic surplus
6. costless system (coordinates self)
7. economic freedom

Question 2

technological improvement (benefit of perfect competition)

Answer 2

-creates incentive to innovate and develop new technology

improvement = decrease in cost of production =increase in profit = increase supply ( more firms entry market because ease of entry into market is easy) = decrease in price

Question 3

allocative efficiency

Answer 3

p=MC where S=D, cost of using resources weighed against satisfaction of the product, MC measured against marginal utility of consumption

price is most equal to marginal utility
BEST FOR CONSUMERS

Question 4

productive efficiency

Answer 4

P= min AC product produced at lowest cost possible, its most efficient
-most efficient size + output
BEST FOR SOCIETY

Question 5

long run equilibrium

Answer 5

perfectly competitive P=MC= min AC AND MIN LRAC ECONOMIES OF SCALE
THEREFORE total profit will be 0 and they firms will operate at max efficiency

Question 6

economies of scale - a benefit of perfect competition

Answer 6

firm has incentive to increase size to increase profit when total profit is greater than zero, there is an increase in supply, more firms enter or existing firms grow which decreases the price

Question 7

total surplus

Answer 7

-maxed when perfectly competitive
-cs below d above p
-ps below p above s
economic surplus is cs + ps

Question 8

Market failures (5)

Answer 8

1. income/ wealth inequality
2. instability
3. forces of uncompetition
4. provision of public goods
5. market ignores externalities

Question 9

pure public goods

Answer 9

non excludable (impossible to exclude non-buyers) 
non rivalrous (one persons consumption does not decrease another's )

Question 10

private goods

Answer 10

excludable, rivalrous

Question 11

quasi public goods

Answer 11

(sorta public) -hospital roads education

• private goods provided by government
• they are provided because cost of collecting fees is prohibitive

Question 12

externalities

Answer 12

external costs and benefits from producing a good

Question 13

external costs

Answer 13

costs incurred by the people who dont produce/ consume
water(chemical/biological pollution)
air (co2,nox)
noise
visual

Question 14

marginal private cost

Answer 14

MPC additional cost to producers from increased production THIS IS ALSO THE SUPPLY CURVE (REGULAR ONE) AND IT ALSO =MC

Question 15

marginal external cost

Answer 15

MEC addition cost to society from production ( not on regular supply curve )

Question 16

marginal social cost

Answer 16

MSC addition cost to both producer and society

MPC+MEC= MSC which is the new supply curve

Question 17

MPC

Answer 17

marginal private cost

Question 18

MEC

Answer 18

marginal external cost

Question 19

MSC

Answer 19

marginal social cost

Question 20

solutions to pollution

Answer 20

• command and control - legislation and standards
• Tax on producer or consumer, tax each unit of pollution
• market based solutions- CAP AND TRADE PERMITS

Question 21

external benefits

Answer 21

benefits incurred by people who don’t produce or consume goods - education/healthcare

Question 22

marginal private benefits

Answer 22

MPB- additional benefit to customer from one more unit of consumption MPB= D
so MPC= supply, MPB = D

Question 23

marginal external benefit

Answer 23

MEB- addition al benefit to society

Question 24

marginal social benefit

Answer 24

MSB =MPB+MEB complete demand curve including all benefits of consumption

Question 25

cap and trade- traceable emission permits

Answer 25

demand for permits (right to pollute)- then price = zero will produce a lot of pollution

option 1- issue a fixed number of permits, market will determine price– firms prefer this option, they can just cut down on pollution without paying

option 2-permits sold for a specified amount, the market will determine quantity- there’s an unlimited amount t– government prefers this one because they can make revenue

Question 26

taxes + external cost

Answer 26

S= MPC (marginal private cost)
tax puts price on pollution and creates a more socially optimal equilibrium
tax= MEC- marginal external cost

new curve of MEC+ MPC =** MSC marginal social cost of the product
TAX INCREASE PRICE AND DECREASE QUANTITY TRADED

Question 27

subsidy on consumer

Answer 27

MPB marginal private benefit original demand curve
MEB– size of subsidy
MSB- marginal social benefit (MPB+MEB)

Increases consumption of a product that has external benefits to society

subsidy decreases price and increases quantity traded

Question 28

subsidy to producer

Answer 28

MPC= supplu
MEB- subsidy
MPC + subsidy = new supply curve
increases quantity decreases price