Q.38 In the argument for why perfect ... [FREE SOLUTION]

Chapter 8: Q.38 (page 212)

In the argument for why perfect competition is allocatively efficient, the price that people are willing to pay represents the gains to society and the marginal cost to the firm represents the costs to society. Can you think of some social costs or issues that are not included in the marginal cost to the firm? Or some social gains that are not included in what people pay for a good?

Short Answer

Expert verified

Public parks, education, and national defense are examples of positive externalities that are not taken into account when calculating marginal willingness to pay. Externalities in the market are societal costs and benefits that are not accounted for in the firm's marginal cost and profit.

Step by step solution

Definition

Perfect competition:

According to economic theory, perfect competition occurs when all firms sell the same things, market share has no influence on pricing, companies can join and exit the market without restriction, buyers have perfect or full knowledge, and corporations cannot set prices.

Explanation

Negative externalities such as pollution caused by industrial manufacturing, enterprises selling socially harmful goods such as alcohol and cigarettes, and tourism companies creating environmental damage are examples of societal expenses that are not reflected in the firm's marginal cost. Similarly, positive externalities such as public parks, education, and national defense are examples of social benefits that are not factored into marginal willingness to pay. Externalities in the market are societal costs and benefits that are not accounted for in the firm's marginal cost and profit.