Problem 3: Markets and Regulation.

(a) Name 3 reasons for market failure.

(b) Name 2 reasons for government failure.

(c) Name 2 reasons in support of state regulation instead of national regulation.

(d) Name 2 reasons in support of government regulation instead of state regulation.

(e) Name 3 sources of inefficiency of monopolies.

(f) Name 2 sources of inefficiency of competitive markets.

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Jamar FerryLv2

1 Nov 2018

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If you had to argue that the diamond business in South Africa was a natural monopoly, what reasons would you give? Why would you think that the South African government is keen on keeping the diamond monopoly intact?

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Explain why it is that high-powered regulation encourages cost cutting by the regulated firms while low-powered regulation does not. What is meant by high and low-powered regulation of monopolies or dominant firms?

(4)

What is regulatory capture? What is Rent-seeking? Why do you think that regulatory capture is so prevalent in representative democracies where market power exists among large firms?

(5)

Explain what we mean is when we say that the existence of monopoly prevents: inefficient use of resources (factors of production

A major difference between monopolistic competition and perfect competition is:

a. there are barriers to entry in monopolistic competition. There are no barriers to entry in perfectly competitive markets.

b. monopolistically competitive firms sell differentiated products. Perfectly competitive firms sell identical products.

c. government regulation restricts the ability of monopolistically competitive firms to change their prices. Perfectly competitive firms face no price regulation.

d. the market demand curve in a monopolistically competitive market slopes downward. The market demand curve in a perfectly competitive market is horizontal

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1.The ATC curve for a natural monopoly falls as output increases.

(A) Rises as output increases.

(B) Stays the same as output increases.

2. At what point would the government need to subsidize a price-regulated monopoly in order to keep it from exiting the market in the long run?

(A) Price < ATC

(B) Price < MC

(D) ATC > MC

3. Forcing a natural monopoly to provide a minimum amount of a good or service would likely cause the firm to

(A) Cease production unless the government provides a subsidy

(B) Reduce costs through improved efficiency

(D) Inflate costs to increase maximum allowable profits

4. Regulation is appropriate if

(A) Market failure exists.

(B) Market failure exists and the benefit of regulation outweighs the cost.

(D) Regulation is costless.

5. Before the deregulation in the airline industry, airlines charged higher rates on long flights in order to make short flights cheaper. Such a practice is an example of:

(A) Cross-subsidization

(B) Price discrimination

(D) Externalities