Podcast
Questions and Answers
What can cause market failure?
What can cause market failure?
Which of the following represents an externality?
Which of the following represents an externality?
If a copper refinery does not bear the entire cost of emitted smoke, what is the likely outcome?
If a copper refinery does not bear the entire cost of emitted smoke, what is the likely outcome?
Which activity is most likely to result in an external benefit?
Which activity is most likely to result in an external benefit?
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If education produces external benefits for society, what might NOT be an appropriate policy for society to adopt?
If education produces external benefits for society, what might NOT be an appropriate policy for society to adopt?
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Which of the following is true about a market economy compared to a centrally-planned economy in terms of efficiency?
Which of the following is true about a market economy compared to a centrally-planned economy in terms of efficiency?
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How do prices direct economic activity in a market economy?
How do prices direct economic activity in a market economy?
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Which type of firm is most likely to have market power?
Which type of firm is most likely to have market power?
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How does the 'invisible hand' direct economic activity?
How does the 'invisible hand' direct economic activity?
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What can hinder the invisible hand's ability to coordinate decisions in an economy?
What can hinder the invisible hand's ability to coordinate decisions in an economy?
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What is a primary function of prices in a market economy?
What is a primary function of prices in a market economy?
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What was the average cost per house for the first 50 houses built by the construction company?
What was the average cost per house for the first 50 houses built by the construction company?
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If the company builds the 51st house, what will be the marginal cost of this additional house?
If the company builds the 51st house, what will be the marginal cost of this additional house?
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Why are people willing to pay more for a diamond than for a bottle of water?
Why are people willing to pay more for a diamond than for a bottle of water?
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What impact have seat belt laws had based on the evidence provided?
What impact have seat belt laws had based on the evidence provided?
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Which group benefits most from mandatory seat belt laws according to the available evidence?
Which group benefits most from mandatory seat belt laws according to the available evidence?
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If the company can experience a marginal benefit of $190,000 by building the 51st house, what should they do?
If the company can experience a marginal benefit of $190,000 by building the 51st house, what should they do?
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What does market power refer to?
What does market power refer to?
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Why could higher income tax rates on rich people be justified in the United States?
Why could higher income tax rates on rich people be justified in the United States?
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What do the basic principles of economics imply policymakers should do?
What do the basic principles of economics imply policymakers should do?
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If you have $100 to invest and choose Project 1, what would be the total cost (including opportunity cost)?
If you have $100 to invest and choose Project 1, what would be the total cost (including opportunity cost)?
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Which of the following is NOT a reason higher income tax rates on rich people could be justified?
Which of the following is NOT a reason higher income tax rates on rich people could be justified?
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What is one way policymakers should not intervene in economic activity?
What is one way policymakers should not intervene in economic activity?
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What is the characteristic of rational people when making decisions at the margin?
What is the characteristic of rational people when making decisions at the margin?
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How is a marginal change typically defined?
How is a marginal change typically defined?
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What does the marginal benefit of eating the third orange refer to?
What does the marginal benefit of eating the third orange refer to?
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If three seats remain unsold on the Floating-On-Air Bus trip, how could the bus company increase its profit?
If three seats remain unsold on the Floating-On-Air Bus trip, how could the bus company increase its profit?
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In the scenario provided, what type of people are described as making decisions at the margin?
In the scenario provided, what type of people are described as making decisions at the margin?
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What concept is used to determine Teresa's willingness to eat another orange in the scenario?
What concept is used to determine Teresa's willingness to eat another orange in the scenario?
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Study Notes
Market Failure Causes
- Market failure can occur due to externalities, public goods, information asymmetries, and market power.
- When a market does not allocate resources efficiently, it leads to suboptimal outcomes for society.
Externalities
- An externality is a consequence of an economic activity that affects third parties not directly involved in the transaction, such as pollution from a copper refinery.
Cost Absorption in Copper Refinery
- If a copper refinery does not bear the full cost of emitted smoke, it may lead to overproduction and environmental degradation since the refinery can operate with lower costs than justified.
External Benefits
- Activities like education tend to produce positive external benefits for society, enhancing the overall economic welfare and productivity.
Policy Implications for External Benefits
- A policy that subsidizes education may NOT be appropriate if it leads to market distortion, encouraging over-education or misallocation of resources.
Market vs Central Planning Efficiency
- Market economies generally achieve greater efficiency than centrally-planned economies due to the decentralized decision-making process that responds to consumer demands.
Price Function in Market Economy
- Prices act as signals in a market economy, guiding producers and consumers in their economic decisions by reflecting supply and demand.
Market Power and Firm Types
- Firms with significant market power can influence prices and are typically those with few competitors or unique product offerings.
Invisible Hand
- The "invisible hand" refers to the self-regulating nature of the marketplace, where individual pursuit of self-interest leads to collective economic benefits.
Obstacles to Invisible Hand Coordination
- Market imperfections, externalities, and inadequate information can hinder the invisible hand's effectiveness in coordinating economic activity.
Primary Function of Prices
- Prices serve to allocate resources, signal preferences, and ration scarce goods efficiently within a market economy.
Average Cost per House
- The average cost per house for the first 50 houses built by the construction company would need specific figures to determine, typically calculated by dividing total costs by the number of houses.
Marginal Cost of the 51st House
- The marginal cost of building an additional house is the cost related to producing one more unit, which varies based on labor, materials, and construction efficiencies.
Willingness to Pay for Diamonds vs Water
- People are willing to pay more for diamonds than for water due to the concepts of scarcity, perceived value, and the utility derived from each product.
Impact of Seat Belt Laws
- Evidence shows that seat belt laws have reduced fatalities and injuries in car accidents, emphasizing the importance of safety regulations.
Beneficiaries of Mandatory Seat Belt Laws
- The primary group benefiting from mandatory seat belt laws is typically drivers and passengers, who face reduced risks of injury or fatality.
Building Decision for the 51st House
- If the marginal benefit of $190,000 from building the 51st house exceeds the marginal cost, the company should proceed with the construction.
Definition of Market Power
- Market power is the ability of a firm to set prices above the competitive level, often resulting from a lack of competition.
Justification for Higher Income Taxes
- Higher income tax rates on wealthy individuals may be justified as a means to address income inequality and fund public services.
Policymaker Principles
- Economists suggest that policymakers should consider the trade-offs and opportunity costs of economic decisions to promote efficiency and equity.
Investment Opportunities and Costs
- When choosing a project, the total cost should include both direct expenses and opportunity costs associated with the investment choice.
Justifications for Tax Rates
- A non-justification for higher tax rates might include the argument that they disincentivize investment or savings.
Economic Intervention
- Policymakers should avoid unnecessary interventions that distort market signals or competition, opting instead for measures that enhance efficiency.
Decision-Making Characteristics
- Rational individuals will make decisions based on marginal analysis, weighing the additional benefits against the additional costs.
Definition of Marginal Change
- Marginal change refers to small, incremental adjustments in economic activity that influence decision-making.
Marginal Benefit of Eating Oranges
- The marginal benefit of eating the third orange relates to the additional satisfaction or utility gained from that specific consumption.
Increasing Profit with Unsold Seats
- The bus company could increase profit by offering discounts or promotions for the remaining unsold seats in order to fill the bus.
Decision Makers at the Margin
- Individuals making decisions at the margin typically weigh the benefits and costs of their choices, seeking to optimize their utility.
Willingness to Eat Another Orange
- Teresa's willingness to eat another orange may be assessed using the concept of marginal utility, which measures the satisfaction gained from consuming one more unit.
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Description
Test your knowledge on market economy concepts with these quiz questions focusing on the influence of prices, economic activity direction, and firms in the system.
