I need help in these problems, it\'s microeconomics course Problem 6 Miscellaneo

Question

I need help in these problems, it's microeconomics course

Problem 6 Miscellaneous Short Answer Questions (a) When is an outcome (allocation) Pareto efficient? (b) Give two conditions that can cause markets to fail (ie. not produce a Pareto efficient outcome c) Why are monopolies generally harmful to the economy? (d) Are there cases where a monopoly might not be so bad? (give at least one example where monopoly power has some benefit compared to a competitive market) (e) Describe a policy remedy for a negative production externality? (f) Describe a policy remedy for a monopoly?

Explanation / Answer

Answering first three for you:

(1) Pareto efficiency is said to occur when it is impossible to make one party better off without making someone worse off. A Pareto improvement is said to occur when at least one individual becomes better off without anyone becoming worse off.

(2) Conditions for market failure:

1. The existence of monopoly or imperfect competition;

2. The presence of externalities, i.e. external economies and diseconomies in production and consumption; and

3. The consumption of Public Goods,

(3) A monopoly is a business that's the only provider of a good or service. They are harmful for the whole society and economy because

a) Since monopolies are the only provider, they can set pretty much any price they choose. This is known as price-fixing. This is especially true for goods and services where there is inelastic demand, where people don't have a lot of flexibility.

b) Monopolies may  supply inferior products. This has happened in some urban areas, where grocery stores know that the poor urban dweller has fewer alternatives.

c) Monopolies are also bad for an economy because the manufacturer has no incentive to innovate, and provide "new and improved" products.

d) They can create inflation. Since they can set any price they want, they will raise costs to consumers. This is known as cost-push inflation

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