Answer to Question #225903 in Microeconomics for Devil

Question

(a) Define market failure and its causes. 

 (b) What is comparative theory of international trade explain. 

 (c) Define Economic Rent & show different situations of economic rent.

Answer 1

(a) Market failure refers to the inefficient distribution of commodities and services in a free market .

Causes of Market failure

(i)Incomplete markets

Under perfect competition, certain markets are incomplete or absent. Market failure is caused by the absence of markets for public goods and common property resources.

(ii)Imperfect Markets

Under perfect competition, Pareto efficiency rises. However, when there are market defects or distortions, it decreases.

(iii)Externalities

Market failure is also caused by the presence of externalities in consumption and production. Externalities are flaws in the market where there is no price for a good or a bad service. Externalities induce resource misallocation and consumption or output to fall short of Pareto optimality.

(iv)Common Property Resources

A shared property resource is another form of market failure. When common ownership is combined with free access, it can lead to wasteful exploitation, in which a user disregards the consequences of his actions. Access to publicly owned resources is a key component of waste and inefficiency.

(b)The ability of an economy to produce a specific good or service at a lower opportunity cost than its trading counterparts is known as comparative advantage theory. A comparative advantage allows a corporation to sell goods and services at a cheaper cost than its competitors while maintaining higher profit margins.

(c)Economic rent is the amount paid to the owner of a production factor in excess of the cost that must be incurred in order to use that component in the production process.

Situations of economic rent include;

(i)Contract rent

Contract rent is a situation in which two parties have reached an agreement, but external conditions change over time, offering one party uneven profit; usually at the expense of the other.

(ii)Monopoly Rent

Monopoly rent refers to a situation in which a monopoly producer lacks competition and hence can offer its goods and services at a significantly higher price than the ordinarily competitive market pricing, at the expense of customers.

(iii)Differential Rent

Differential rent is the surplus profit that might arise as a result of variances in land fertility. The differential rent is the excess that results from the difference between marginal and intramarginal land. It's usually accumulated in areas where there's a lot of land to cultivate.