8. Property rights and market failures Bakers are much likely to supply pastries

Question

8. Property rights and market failures Bakers are much likely to supply pastries to the market if property rights are enforced. In the presence of market failures, public policy can improve economic efficiency Classify the source of market failure in each case listed. Market Failure There is only one car dealership in a small town, giving the dealership the ability to influence the price of cars. A person smoking in a restaurant emits second-hand smoke that harms other restaurant patrons. Market Powe Externality

Explanation / Answer

SOLUTION:

1) Bakers are much more likely to supply pastries to the market if property rights are enforced. If the presence of market failure, public policy can improve economic efficiency

2) There is only one car dealership in a small town, giving the dealership the ability to influence the price of cars. Market power

A person smoking in a restaurant emits second-hand smoke that harms other restaurant petrons. Externality

Explanation: Property ghts refers tp the ability of individuals to own and control their own scarce resources. In absence of enforcement of property rights, bakers will be less likely to produce pastries because of the possibility of potentially to be stolen without compensation paid to the bakers. On contrary, if property ghts are enforced, bakers will be more condent that they will be compensated for their pastries and hence will be more likely to supply pastries in the rst place. Wwith this approach, the enforcement of property rights can be beneficial to move the market toward a more efcient level of production of goods and services.

An externality refers to the cost or gain that affects a party who did not choose to incur that cost or benefit

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