Consider specific products. a) When should the government regulate specific prod

Question

Consider specific products.

a) When should the government regulate specific product markets and when should we let supply & demand do their job? (Don't get bogged down in "big issues" such as income distribution or product safety or macro issues) Think of a product like skirts. Should the government give out free skirts to all, or should they be sold in stores?

b) Consider the product called 'education.' Why is public school "free" but you need to pay (use supply and demand) for college?. Hint: Consider/cite specific examples. For example, do we use supply and demand within the family unit? Regulation of housing/construction markets? School vouchers?

C-What is the distinction between the short run and the long run? Cite examples from various sized firms.

D- Explain and discuss how you think studying for an exam is subject to the Law of Diminishing Returns. You might also throw into the discussion how this relates to opportunity cost and economic choice (marginal cost versus marginal benefit) of how you choose to spend your time.

Explanation / Answer

a. Government should regulate specific product market mostly in case of monopoly market structure and in case of defense industry. Since market players concentrate on increasing their profits and in case of monopoly there is no competition and very high prices can be set by market players, thus government intervention is required to price the product according to marginal cost pricing and average cost pricing. The example cited in the question do not require government intervention as shirts have monopolistic type of market structure thus prices cannot be very high.

b. Government subsidizes early education of the students as education creates positive externality for the society and thus government provides free education so that all can avail the benefits of education. College education is costly and thus government cannot subsidize it for all and also students decide different fields after school and providing free education at college level will involve a lot of government expenditure and spending and thus only school education is free and not college education.

c. Short run refers to the time when some factors of production are fixed while other factors of production are variable and is generally up to one year. Capital is fixed in short run while labor is variable in short run.In the long run all factors of production are variable.

d. Studying for an exam is subject to Law of Diminishing returns because before an exam the study hours increases and sometimes beyond our capacity. In the initial hours increasing returns apply and our efficiency is high. However, during night one has to take coffee, tea to keep oneself up and efficiency declines as law of Diminishing returns apply. Also marginal benefit of studying is more than marginal cost of studying during exam time and thus one continues studying even when law of diminishing returns apply.

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