Explain how the introduction of an additional competitive market can always solve the efficiency problem that emerges from a negative externality.
What will be an ideal response?
A negative externality arises when the production or consumption of a good imposes negative marginal benefits on non-market participants -- and market participant have no incentive to take these into account. Put differently, a negative externality can the thought of as the unauthorized use of an input -- clean air, clean water, time of others on the road, etc. -- that is not priced because of the non-existence of a market. If that input could be defined, property rights in it established and trade opened, the input would be priced competitively just as labor and capital are priced competitively.
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Economics is the study of
a. how to start a business b. how to make money in stocks, bonds, and real estate c. choice under conditions of abundance d. choice under conditions of scarcity e. multinational business
A price system is considered to be efficient when
A) it fails to have the goods that consumers want. B) an underground market develops. C) all resources are allocated to the highest-valued uses. D) firms produce more than what consumers want.