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?