Market efficiency and market prices

Chapter 3

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Q1.

Market efficiency is the degree to which the prices in the particular market replicates vital information of the market. In the long run, a perfectly competitive market achieves allocative and productive efficiency. It means that there is no waste in the production process since resources are allocated at a socially preferred level. Therefore, the prices in a perfectly competitive market are equal to the lowest potential average cost.

Q2.

Everyone in the market- both sellers and buyers- are acquainted with all the necessary information regarding the perfectly competitive market. Therefore, there is no discrimination implying that buyers and sellers must deal with each other openly at the market price. Products in the market are also homogeneous, and the factor of production is perfectly mobile; thus, the cost of production is the same across the market. If the perfectly competitive market assumptions are not valid, the market will lose its sales to its competitors.

Q3.

Market failures cause the market not to perform perfectly. Sources of market failure include an inadequate quantity of public goods, an abundance of demerit goods such as drugs, internal and external externalities, underproduction of merit goods, environmental issues, and monopoly power abuse. For example, an abuse of monopoly power as a source of market failure causes a company to produce goods or services of low quality as price them at a price higher than the marginal cost.

Q4.

The government aims at having a direct objective to influence operations in the economy and markets. The government strives to bring economic impartiality and eliminate market inequalities by regulating, taxing, and providing market operations subsidies. For instance, government intervention ensures that firms do not exploit the monopoly power by paying low wages and charging high prices for goods and services, thus maximizing social welfare.

Q5.

The causes of the Great Depression of the 1930s include the fluctuation of the stock market price where the prices of the shares fell drastically. The fall of prices caused investors to lose confidence in the economy, thus withdrew their investment. Also, bank panics and monetary contraction contributed to the 1930’s Great Depression as many people hoarded their money in cash form causing many banks to close. Besides, the gold standards, which restricted the U.S. monetary policy, and the decreasing international lending and trade due to high-interest rates, played a role in spreading the Great Depression to other countries.

Q6.

Keynesian Economics is a demand-side economics theory that explains how aggregate demand affects the level of output and inflation in the economy. Keynesian economics combated the Great Depression of the 1930s by increasing the U.S government spending and reducing taxes to increase disposable income to improve the people’s expenditure and increase output, thus pulling the country out of depression closing the recessionary gap.

Q7.

Some of the pros of government intervention in the free market system are reducing inequalities through taxation. Also, there is the protection of the environment and society. For instance, when the government imposes a Pigovian tax an industry, there is a reduction of pollution in the atmosphere, thus protecting the community from health problems.

The cons of government intervention in the free market system are limited choices, causing a lack of economic freedom and individual welfare dissatisfaction. Another disadvantage is the lack of incentive, which is usually present in the free market, causing production inefficiency. For example, in the government-owned companies, the products produced are often not demanded by consumers, and there is overstaffing.

Chapter 4

Q5.

An example of an adverse selection is when a seller of second-hand clothes sells a piece of cloth with a default to a buyer who is not aware and not informed about it. Therefore, the buyer is often reluctant to pay for the fabric with a fear of the reason as to why the cloth is being sold. To minimize the problem of adverse selection and moral hazard, disclose all the information regarding the product being sold.

Q6.

The pros of Obamacare include: –

• Many American citizens are health insured as it is more affordable
• American citizens with preexisting health conditions are not denied insurance coverage
• There is no limit of insurance coverage on care, including chronic patients
• Screenings are covered with drugs costing less

The cons of Obamacare include: –

• People who already had health insurance pay more premium
• An increase of taxes to subsidize the health insurance
• Employees hours are cut by firms to avoid covering the workers

Q7.

Health care economics boosts a state’s economy because when the people of a country receive proper health care, their productivity increases, thus affecting a nation’s economy.

Also, healthcare economics will reduce the production losses as many lives will be saved, and work absentees resulting from illness will reduce.

Consecutively, healthcare economics will reduce the gap between the poor and the rich. As proper health care is incorporated in the state, taxes increase to support the initiative where the rich are taxed more, and people with poor nutrition are given appropriate nutrition care.

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