Chapter 9 Market Power, Market Failure, and General Equilibrium

Describe how natural advantages and thus natural market power can erode. Give examples.

Advantages don't last forever. New technologies undermine advantages.

Describe the costs and benefits of a rent-generating structure like apartheid.

Costs include inefficiency, lack of productivity, and lack of commutative justice. The benefit is that a few have power and skills.

Define: economies of scale. Explain how such economies can create natural market power. Give an example.

Economies of scale: increasing returns to scale, so the input and output increases, driving down the cost which is a natural economic advantage that creates market power because the first firm builds up the scale and drives down the cost per unit of production.

Identify the unique characteristic of a general competitive equilibrium that distinguishes it from all other general equilibria.

General competitive equilibrium has no market power, no market failure and is Pareto optimal.

Describe the phenomenon called market failure.

If a market does not form quickly or does not form at all when individuals need their choices coordinated.

Ceteris paribus, show and explain how these two markets for comparable jobs would adjust if one of these jobs initially had a higher wage under out nice assumptions.

If one market for similar jobs has a higher pay, the people in the lower paying market will move to the higher paying marker increasing the supply therefore driving wages down in the higher paying market and decreasing the supply and driving the wages up in the lower paying market until they are equal.

Identify the source of naturally occurring market power and explain its relationship to commutative justice.

It comes from nature. It is a natural gift. These gifts are natural, but give a person more power naturally, so commutative justice is unbalanced.

Describe the equity and efficiency implications of market power.

Market power alters the distribution of benefits of those who have power. Equity is affected but cannot be determined in a good way or bad way. Efficiency is affected negatively because one is not forced to be efficient. The pressure to be creative and innovated are eliminated or lessened.

Describe and explain the efficiency and equity effects of market power on the general system.

Market power is not productive. The large share given to someone with power is taken away from someone without it. Power also distorts micro- market activity and makes it less efficient.

Explain the concept: artificially created market power. Give examples.

Market power that is not natural such as patents. Power over the entire market given by the government to be creative.

Demonstrate with an example how an externality can be positive and negative at the same time in the same place.

Music at a restaurant can be a positive externality for some who enjoy the type of music or a negative externality for someone who does not enjoy it.

Cite and explain examples of naturally occurring market power.

Naturally occurring market power are athletic ability and beauty. These have big markets and allow someone to have more power and make more money.

Describe the relationship between the concepts: general competitive equilibrium and general equilibria.

Pareto optimal general competitive equilibrium that the market system achieves under nice assumptions is a special case of all the possible equilibria into which the system can resolve itself. General competitive equilibrium is a type of equilibria.

Describe the purpose of patents. Explain why a patent is artificially created market power.

Patents give an inventor incentive to be creative by promising exclusive rights over the invention which is complete market power artificially created by the government.

Identify the difference between how social and political institutions function as potentially powerful constraints on market behavior.

Political uses laws whereas social institutions just manipulate perceptions and choices.

Explain why pollution is often associated with the concept of negative externality.

Pollution never provides any benefits for anyone.

Explain how controlling access to education can serve as a rent-generating mechanism. Give examples.

Poor education brings poor human capital skills to the market, which forces these people in the lowest economic segmentation to fight for low wage jobs, suppressing opportunity. Higher education gives higher skills, which leads to higher, paying jobs. This allows for more rent in this market because it is artificially made to have a lower supply.

Contrast positive and negative externalities. Give an example of each.

Positive externalities (impose an external benefit) are a garden. Negative externalities (activity imposes a negative effect) are smoking or disposing toxins in air therefore polluting it.

Describe the costs of power.

Power causes the market to be less efficient.

Explain the role of property rights in a liberal, market society.

Property rights are essential for exchange. We can only exchange what we own in property rights.

Explain how and why non-violent and/or violent resistance to a rent-generating power structure can possibly lead those who hold power to negotiate. Give examples.

Protests such as sanctions, boycotts and strikes raise the price of power. The increase in challenges increased the price of power until negotiations were necessary.

Explain why public television and public radio suffer from the free rider problem.

Public TV and radio need donators. Most people do not donate but expect the free good.

Describe a public good. Give an example.

Pure public good: non partitionable (cannot be broken into pieces) and non-excludable (provided to anyone). Example: national defense.

Describe and explain the possible connection between rent-seeking/maintenance activity and contributions to political groups.

Rent seeking and maintenance activity is connected to politics because firms will donate to politicians in order for them to vote in a certain way that will benefit the firm, such as sustaining or creating market power.

Define: rent-seeking activity. Give and explain an example.

Rent seeking: effort to achieve an artificially created advantage that will create rent. Pass a law imposing a tariff on the foreign competitors, which raises the price and makes them less competitive. Less competition means more market power.

Explain the concepts: scale of production and returns to scale. Contrast these two concepts.

Scale of production: size of the process of production. Returns to scale: degree to which change in the scale of production changes level of outputs. The scale of production effects the returns to scale.

Explain how socialization connects to markets.

Socialization can influence perceptions, which affects choices in the market.

Describe how socialization that demarcates expectations by gender and/or race affects market outcomes. Give examples.

Socialization that effects gender or race affects what markets men, women, blacks and whites can enter for jobs, which limits market efficiency and productivity.

Explain why national defense in often cited as a good example of a pure public good.

The national defense protects everyone all or nothing because if they didn't, some people would get hurt.

Describe the consequence of any institutional constraints, social and/or political, that crowded women into a limited set of labor markets. Use graphs to tell your story.

When women are crowded into markets, supply is artificially expanded which lowers wages. Absence of women in men's markets artificially contracts supply-increasing wages. Women have artificially low wages as they compete for limited jobs and artificially high wages for men.

Define: rent-maintenance activity. Give and explain an example.

allocating resources for the purpose of sustaining a market advantage. Rent is return to control based on power and rent maintenance is an effort to sustain a return to power. Automotive firms par politicians to keep a tariff up on foreign competitors

Given an externality graph identify the exact size of the positive or negative externality it represents.

area between MSC and MPC it is MEC MSC=MPC+MEC

Describe the benefit of power.

control and larger shares of society's endowment with little effort.

Describe a risk externality. Give an example.

creating risk for bystanders. Example: drunk driving.

Describe the free rider problem. Explain why it occurs.

incentive to wait for someone else to pay for the good to be provided because once it is provided everyone can enjoy.

Define: monopoly, monopsony. Give example of each.

monopoly: only seller in a market, like generators during a massive blackout monopsony- power from being the only buyer, like parts for a car only you own

Describe an externality. Identify the general cause of externalities. Identify the "missing signal," the absence of which allows externalities to occur.

property rights to resources are either not assigned or not enforceable. The use of externalities affects others use of it. The cost is external to the consideration of others. Most people do not consider the full cost of their actions on externalities. Cannot enforce a property right on externalities.

Explain how socialized perceptions, your own or those in the market, can constrain your range of choices and effectively limit your access to the market.

social institutions can also factor into our perceptions of what is appropriate for certain genders or races

Using an appropriately labeled graph, represent the case of a negative externality. Interpret your graph. Show and explain the difference between the optimal view of activity from a private versus a social perspective.

the firms marginal cost curve is too high. they are over-producing. society dislikes the uncalculated externality and wants less

Using an appropriately labeled graph, represent the case of a positive externality. Interpret your graph. Show and explain the difference between the optimal view of activity from a private versus a social perspective.

the firms marginal cost curve is too low. they are under-producing. society likes the uncalculated externality and wants more

Identify and explain two reasons why a natural gift is not always a ticket to a big income.

A natural gift may not always mean a large income in things such as women's bowling, poetry and women's basketball. These differences lie in the marketability of each gift. Also, there are many substitutes, so elasticity of input substitutes is high. There is a low demand.

Using an appropriate graph, describe the efficiency effect of a negative externality, of a positive externality.

A negative externality is a market failure that is inefficient because not all costs are taken into account. A positive externality is also inefficient because the actor does not take external benefits into account. In both cases, the difference between what's socially optimal and the private actor will do causes inefficiency.

Explain why a public park is not a pure public good.

A public park can be sold to a private company, and they can charge a fee, or it can exclude certain people like non-residents or races.