Market Failure and Government Response Test

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eliotn Posted: Fri, Nov 7 2008 1:45 PM

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I would like some suggestions to respond to these questions:

1. Why are public goods underprovided by the market mechanism and how is this problem often solved?

2. What are possible solutions to negative externalities?  Supplement your answer with a graph?

3. How might governments attempt to address the problem of underconsumption of merit goods?

4. How might the extension of property rights diminish negative externalities?

5. How could a market for tradable "pollution" permits reduce pollution?

6. Why are international agreements so vital in dealing with negative externalities such as pollution?

7. What are the characteristics of a monopoly?

8. What are the advantages and disadvantages of monopolies?  Cite examples of both.

9. Describe the barriers to entry that keep monopolies safe from competition.

10. What is the moral hazard problem? Cite an example.

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mr_anonymous replied on Fri, Nov 7 2008 2:02 PM

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Regaurding number 7: A market where one firm dominates because of blocked entry to that market which is established by the state.  So, one characteristic of a monopoly is that it can only develop with government intervention.   

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Liberty-RHIT replied on Tue, Dec 16 2008 1:28 AM

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eliotn:

I would like some suggestions to respond to these questions:

4. How might the extension of property rights diminish negative externalities?

9. Describe the barriers to entry that keep monopolies safe from competition.

Economics homework. huh?

4. Negative externalities impact a third party that isn't involved in the economic activity/transaction. For example, pollution does lots of harm beyond the device it originates from.

If all property was private property, then all property would have an owner who could prosecute anyone who does it harm. In other words, if all damage from negative externalities is done to private, not public, property, then all damage can be sued for.

9. This is also a response to the above post. There are naturally-occuring barriers to entry, but they are uncommon, don't automatically lead to monopoly formation, and can be overcome by technological advancement.

One such barrier is ownership of all resources. An example would be one company buying up all oil supplies across the planet. Then it would be a monopoly on oil. OPEC is a weaker version of this. Technology could overcome a lack of oil ("renewable" or "green" energy).

Another barrier is sunk cost. A well-established firm with much capital, many facilities, contacts/connections, etc. can easily operate and expand. A small firm that is relying mostly on investment has trouble becoming established and getting some of the monopoly's business. However, this can be overcome by loads of investment capital or by offering a niche or superior product.

There you have some libertarian arguments for property rights, and some defense of free-market monopolies.