Loggers are much likely to supply wood to the market if property rights are not enforced. In the presence of market failures, public policy can improve economic efficiency. Classify the source of market failure in each case listed. Market Failure Market Power Externality A manufacturing plant dumps chemical waste into a nearby river, poisoning the water supply for a small town downstream. A single public utilities company is responsible for supplying electricity for an entire state. As a result, the utilities company can set the price of electricity.

Over

Externality

Market power

Explanation:

Externality is a form of market failure where the activities of economic agents affect third parties not involved in production or consumption

Externality can be positive or negative

A good has negative externality if the costs to third parties not involved in production is greater than the benefits.

The costs of polluting the river by the firm is greater than the benefits. Thus, this causes negative externality

Taxation increases the cost of production and therefore discourages overproduction. Tax levied on externality is known as Pigouvian tax.

A firm has Market power when it can increase prices above the level that would exist that in a competitive market.

Firms that have market power are usually monopolies

A monopoly is when there is only one firm that exists in an industry

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