Bakers are much likely to supply pastries to the market if property rights are not enforced. In the presence of market failures, public policy can improve economic efficiency. Classify the source of market failure in each case listed.

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31-01-2020
Business

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Bakers are much likely to supply pastries to the market if property rights are not enforced. In the presence of market failures, public policy can improve economic efficiency. Classify the source of market failure in each case listed.

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jepessoa jepessoa · Answer 1 · 2020-02-02T13:56:49+01:00

Answer:

1) When there is only one car dealership in a small town, giving the dealership the ability to influence the price of cars, market failure is due to MARKET POWER.

2) When a manufacturing plant dumps chemical waste into a nearby river, poisoning the water supply for a small town downstream, market failure is due to EXTERNALITY.

Explanation:

The car dealership has an excessive market power , which refers to the firms ability to increase the price of its products (cars) above the price of a competitive market.

When the manufacturing plant dumps chemical wastes into the river, it is causing a negative externality on the town's water supply. This means that the town (which is a third party in this case) is suffering from the actions of another party's economic transactions.