Question

Loggers are much ___________likely to supply wood to the market if property rights are enforced. In the presence of market failures, public policy can improve economic efficiency. Classify the source of market failure in each case listed.
a. A single grocery store is the only source of food in a small town, giving the store the ability to influence the price of food.
b. A manufacturing plant dumps chemical waste into a nearby river, poisoning the water supply for a small town downstream.

Answer 1

Answer:

a. A single grocery store is the only source of food in a small town, giving the store the ability to influence the price of food. - the source of market failure here is the fact that the grocery store is a monopoly. Because it is a monopoly, it has the market power to charge prices higher than in a free market, and to supply quantities lower than in a free market.

b. A manufacturing plant dumps chemical waste into a nearby river, poisoning the water supply for a small town downstream.  - the source of the market failure here is pollution, a negative externality, because the dumping of chemical waste from the plant is affecting the people of the small town downstream.