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1. Answer the following: a. What is an example of an inefficiency that might occur when a company has market power? b. Offer an example of a company that has market power. (Remember: market power does...

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1. Answer the following:
a. What is an example of an inefficiency that might occur when a company has market power?
. Offer an example of a company that has market power. (Remember: market power does not necessarily imply a monopoly.)
c. How might your example in (b) result in inefficiency in the market? (You might want to refer to your answer for (a).)
2. Name a good with a negative externality. What is the external cost? Will the market (at equili
ium) produce more or less than the socially optimal quantity? (It might help to look at the previous question.) How can the government ensure an optimal amount of the good is produced?
3. Name a good with a positive externality. What is the external benefit? Will a free market for this good provide too much or too little to be allocatively efficient? How can the government ensure an optimal amount of the good is produced?
4. a. Are public li
aries excludable? Explain.
. Are they rival in consumption? Explain.
c. Would you consider public li
aries pure public goods based on your previous answers? Explain.
d. Make the argument that the government does not need to pay for li
aries based on your previous answers (even if you don’t agree with this argument) (Hint: can li
aries avoid the free rider problem if they want to?).
5. Good X is a pure public good. If the government does not provide good X, will the amount provided by the market be more than, less than, or equal to the social optimum? Explain.
6. Firms often use signaling to prevent adverse selection problems. Find an example of a company that uses signals in this way. Please do the following:
a. State the company.
. State what signal the company uses.
c. Briefly explain how this solves potential adverse selection.
7. The 2008 financial crisis is sometimes described as a moral hazard problem. Here is a post explaining (and discounting) this explanation:
a. Explain how moral hazard might have resulted in the financial crisis.
. If this moral hazard explanation is true, how could the government take steps to eliminate moral hazard in the financial sector?
Answered Same Day Dec 19, 2019


David answered on Dec 24 2019
155 Votes
Table of contents
Question 1    3
Question 2    4
Question 3    5
Question 4    6
Question 5    6
Question 6    7
Question 7    8
Reference list    9
Question 1
a) A company can have market power if there are ba
iers to entry in the market. Market power can also be obtained if a company sells certain differentiated products to the customers. In other words, market power exists in the presence of imperfect competition in the market as compared to the situation of perfect competition. In this connection, several inefficiencies may occur in the presence of market power to a company. An example of this can be allocative inefficiency. This occurs in an imperfectly competitive market due to higher prices and lower levels of output as compared to the case of perfect competition by the virtue of market power (Varian, 2014, p.80). The equili
ium price is also higher than average cost and marginal cost of the company. Thus, there occurs deadweight loss in the market.
Figure 1: Allocative inefficiency and deadweight loss in presence of market powe
Source: (Varian, 2014, p.82)
) The company named Tesco Plc has significant market power in UK retail market. The retail market in this country is characterised by oligopoly which is an imperfectly competitive market.
c) Tesco Plc operates in an oligopoly market and also sells differentiated products due to which it has market power. Hence, it charges higher prices than its marginal cost and total cost. This in turn leads to allocative inefficiency and deadweight loss.
Question 2
Cigarette smoking can create significant negative externality. The external cost associated with cigarette smoking includes the cost of air pollution, deteriorated status of health of the affected persons and others.
In case of negative externality, the equili
ium quantity produced in the market is more than the socially optimal level of output due to which there occurs deadweight loss in the market (Stiglitz and Rosengard, 2015, p.58).
Figure 2: Equili
ium output in case of negative externality
Source: (Stiglitz and Rosengard, 2015, p.59)
The above diagram shows that marginal social costs include the extent of negative externality which is however excluded from the private marginal cost. This leads the market to produce greater quantity as equili
ium output and the costs of negative externalities are shifted to the affected persons.
In this situation, the government should impose necessary taxes on the producers of cigarettes in order to reduce overall output of this product so that the extent of negative externality can be reduced.
Question 3
Education can be an example of a good that creates positive externality. The external benefit associated with education includes the knowledge acquired by the...

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