Answer to Question #58770 in Microeconomics for kaur lk

Question

1.Externality and public goods. What is the difference between them? (a) With the aid of a chart, please explain why do we call some public goods and others private goods? With specific examples please explain why they are public/private. (b) What makes a market ‘fail’? Explain HOW such failure comes about.

2.With the aid of a diagram, please explain why we say that (a) a monopolistic competitor is inefficient. (b) How are some of these monopolistic competitors getting around these inefficient label to be more efficient?

3.Grandpa wants to renew his auto insurance. Let us suppose he can buy either a natural monopoly (no-fault) one or an oligopoly (liability). As a student in big business economics, (a) What are four basic differences on pricing, risk, and premium (b) Which one is better on: - Efficiency ground and - Equity ground

Answer 1

1. An externality is the cost or benefit that affects a party who did not choose to incur that cost or benefit. A public good is a good that is both non-excludable and non-rivalrous in that individuals cannot be effectively excluded from use and where use by one individual does not reduce availability to others.
(a) We call some public goods and others private goods, because public goods are non-excludable and non-rivalrous and private goods are excludable and rivalrous. For example, a fireworks is a public good, beause many people can see it at the same moment and without any competition. An apple is a private good, because only one or few people can eat one particular apple.
(b) A market may fail to distribute public goods according to their characteristics.

2. (a) A monopolistic competitor is inefficient, because of setting price higher than competitive it receives higher profits and creates a deadweight loss to society decreasing consumer surplus.
(b) Some of these monopolistic competitors get around these inefficient label to be more efficient by producing quantity, for which marginal revenue equals marginal cost, at this point they maximize their profits.

3.If Grandpa can buy either a natural monopoly (no-fault) one or an oligopoly (liability), then:
(a) In case of monopoly he can set the price he want, there is almost no risk and the profits are the highest possible, if he produces profit-maximizing quantity. In case of monopoly he can't set the price that he want, the risk is higher and the ability of receiving profits depends on his and his competitors strategies.
(b) Efficiency ground is better then Equity ground.