Why does the model of perfect competition imply that firms will produce the products that households want the most?
What will be an ideal response?
In perfect competition, firms maximize profit by producing where price is equal to marginal cost. The price of a good reflects the value that buyers place on the good. The marginal cost of a good represents the opportunity cost of the resources used to produce the good. Producing a good at a level where price is greater than marginal cost means that society could benefit from producing more of the good. On the other hand, producing the good at a level where price is less than marginal cost means that resources are being used to produce something that households value less than its opportunity cost. In this case, society could benefit by producing less of the good. Thus, if firms always produce where price is equal to marginal cost, the efficient mix of output will be produced.
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Any policy change that results in a Pareto-superior allocation
A) will increase welfare under certain conditions. B) must increase welfare. C) will leave welfare unchanged. D) will have an unpredictable effect on welfare.
According to the Coase theorem, in order to solve a negative externality problem efficiently,
a. the property right must be assigned to the party with the least-cost alternative b. the property right must be assigned to the victim of pollution c. transaction costs must be high d. transaction costs must be low e. property rights must be determined by the courts