Chapter 10 Questions

Question 1

what are the three primary functions of government in the econonomy?

Answer 1

1. allocation
2. distribution
3. stabilization

Question 2

what are four common sources of market failure?

Answer 2

1. profit maximization by a firm with market power
2. market provision of public goods
3. market provision of goods generating externalities
4. lack of information by market participants

Question 3

what are some potential policies to reduce the DWL associated with a “negative externality?”

Answer 3

1. ban the activity entirely
2. establish minimum compliance standards for manufacturers
3. “cap and trade”- issue a certain number of “pollution permits” for society as a whole, and allow people to trade these permits amongst themselves
4. offer subsidies to manufacturers that reduce pollution
5. charge manufacturers a fee for each unit of pollution emitted