Problem 6 Miscellaneous Short Answer Questions (a) When is an outcome (allocatio
ID: 1115302 • Letter: P
Question
Problem 6 Miscellaneous Short Answer Questions (a) When is an outcome (allocation) Pareto efficient? (b) Give two conditions that can cause markets to fail (ie. not produce a Pareto efficient outcome (c) Why are monopolies generally harmful to the economy? (d) Are there cases where a monopoly might not be so bad? (give at least one example where monopoly power has some benefit compared to a competitive market) (e) Describe a policy remedy for a negative production externality? (f) Describe a policy remedy for a monopoly?Explanation / Answer
a) An outfcome is said to be pareto efficient when there is no other solution when one can be made better off by making the other one worse off.Resources are allocated in an efficient manner and it does not imply fairness.
b) Incomplete market information , negative externalities are main reason why markets fail. When there is moral hazal or assymetry of information markets are away from equilibrium which causes inefficient market outcomes.
c) Monopolies always sell at a P>MC which is very high they refuse to sell than the given prices they do not face any restrcitiosn or competiitons , if they are not regulated by laws they create inefficiency and deadweight loss to customer
d)Monopoly may not always be a problem specially the government regulated monopolies are better off that work in favour of society and improve efficienccy where cost of production falls with rise in production leading to benefits of economies of scale .
e) Government generally uses taxes like the pigouvian tax as a remedy for negative externality this helps in reduction of production of goods that increase negative impact on the economy.
f)Mostly to rectify monopoly government uses like regulating prices ,quality of services ,promote more competition and encourage firms to achieve economies of scale to improve there efficiency.
g)The most efficient way is to raise tax revenue through pigouvian tax especially when there is an inefficieny in the market , however income tax can be inefficient and affects savings indirectly affecting investment for the economy.
h) If the government levies a legal or incidence tax it is able to differentiate as to who bears the ultimate cost , this is how demand reacts to chnage in prices if the quantity demanded falls it reduces producer surplus shifting of tax may change the size of deadweight loss.
i)Tragedy of commons is a form of externality problems occurs due to property rights theory , where it is difficult to distribute ownership on usage on a publicly owned resource . People may act in self interest which may then affect efficiency of distribution and depletion of resources available . If the property rights are not well defined it causes problem of exclusion and distribution spoiling resources through collective action.