Question

URGENT
You walk into a bookstore to buy a book to read during your next vacation. On the store’s shelves you find a Patricia Cornwell mystery, a Stephen King thriller, a Nathaniel Philbrick history, a Suzanne Collins dystopian survival romance, and many other choices. When you pick out a book and buy it, what kind of market are you participating in? describe its features.
B. Firms that make and sell paper also create, as a by-product of the manufacturing process, a chemical called dioxin. Scientists believe that once dioxin enters the environment, it raises the population’s risk of cancer, birth defects, and other health problems. Is the production and release of dioxin a problem for society? List some of the ways that the problems caused by externalities can be solved with government intervention.

Answer 1

a. The market is monopolistic competition. Monopolistic industries are monopolistic in some ways and competitive in others.

Features:

• many sellers- there are many firms competing for the same group of customers.
• product differentiation- each producer produces a product that is slightly different from those of other firms. Product differentiation may be real (different ingredients, raw material, etc.) or artificial (different packaging).
• free entry and free exit- firms can enter and exit the market without restriction.

b. The production and release of dioxin is a problem for society and it imposes a negative externality. A negative externality is a cost that is suffered by a third party as a consequence of an economic transaction.

Government solutions to the problem of externalities:

Command and control policies regulate behavior directly. The government can forbid certain activies or set regulations in the form of maximum permissible limits.

Market based policies provide incentives that so that private decision makers will choose to solve the problem on their own. This approach makes use of corrective taxes and subsisides. Taxes increase the cost of producing goods or services generating the externality, thus encouraging firms to produce less output.