Exam 15: The Shortcomings of Free Markets

The cost of trash removal goes up, in part at least, because labor productivity in auto manufacturing goes up.

An efficient allocation of resources requires that a product's price equal its average cost.

Give an appropriate remedy for correcting excessive pollution and note any difficulties in implementing it.

A free rider is one who enjoys the benefits of a public good without paying for it.

An economy produces only two goods, paper and scissors.Dyes from paper production pollute a nearby river.Use a production possibilities curve to illustrate your explanation of how the unfettered market would fail to provide the efficient mix of paper and scissors.

Discuss the role of trust as a critical piece of any principal-agent situation.In particular, what role did trust play in the recent stock market scandals?

Unscrupulous managers have learned ways to manipulate stock options and undermine their benefits to stockholders.Discuss some provisions that could be built into the process to curb such practices.

As manufacturing becomes more efficient, services can be expected to become more costly.

Figure 15-1 -Figure 15-1 describes conditions in the monopolized weezil industry.In the absence of government intervention, the monopolist will produce an output equal to

Government action can usually perfectly correct the market's shortcomings.

A market economy provides solutions to almost all social ills such as poverty and environmental damage.

Producers of computer software are plagued with the problem of "pirating", that is, many people copy software legally purchased by others.The industry estimates that for each legal copy of a program, there are two pirated copies in use.The industry wants strict laws for the enforcement of its "intellectual property rights," but enforcement is obviously very difficult.Economists call this problem

Explain whether the market produces too little, too much, or the right amount: (a) of goods with detrimental externalities; (b) of goods with public good characteristics.

Is increased production of a good beneficial to society?

If interest rates fall, the opportunity cost of spending money today rather than tomorrow

An increase in wages in the public sector is always accompanied by an increase in labor productivity.

Suppose that deposit insurance were reduced to a maximum of $50,000 per account (instead of $250,000).This would address the specific market imperfection of

There is much world concern over the deteriorating condition of the Pyramids and other historical structures in Egypt.While people of all nations enjoy visiting these structures, there has been little financial support for preservation coming from within Egypt or from elsewhere.Economists would describe this as an example of

Electric utilities have trumpeted nuclear power for years, advocating it as lower in production costs than other alternatives.Yet, society has resisted heavy reliance on nuclear power.Explain the source of the disagreement and suggest which side (utilities or society) is correct.

What is the meaning of "a defective telescopic faculty," as described by A.C.Pigou?