Question

1. Briefly explain the concept of laissez faire as the key driving force in a free market system of competition. Why does the economics literature prefer laissez faire market system for pricing and production to alternative market mechanism? Give a real- world example as part of your answer from your reading experience in this chapter. 2. Provide at least two important reasons for the justification of Government legislation to implement the anti-trust laws for allowing free entry and exit of firms. 3. What is the Pareto Condition for Efficiency of production and distribution of resources? Do you think the Pareto condition is still relevant to use in today's state of economy to improve economic efficiency discussed earlier? Give an example as part of your explanation. 4. Explain three conditions of efficiency discussed in this chapter plus the key assumptions on which these conditions could be satisfied. What happens to efficiency conditions if those assumptions are not realistic in imperfect market structure? 5. From your understanding in answering to Q4 above, briefly explain why the existence of oligopoly and monopolistically competitive market structure is expected to create inefficient allocation of resources. Do you think strict enforcement of ant- trust legislation of the government can improve this inefficiency of production and allocation of resources? Why or why not? 6. Using the explanations illustrated in Figure 13.1, draw a diagram to analyze the efficiency of production and distribution for another industry of your choice. Critically explain the rationale for regulation to improve the efficiency from the diagram you will have drawn. 7. Why do economist consider utility companies as natural monopoly to operate efficiently rather than having a competition? Given your logic, why does the government need to regulate those natural monopolies?

Answer 1

1.

Part 1: When market is free and there are many producers then market works with price mechanism and market forces of demand and supply. If demand shifts to the right from D1 to D2 then prices rise in the market from P1 to P2, as shown in the diagram below.Then, prices go up and equilibrium shifts to C, but consumers will contract demand due to higher prices and again Q3 quantity will be demanded, firms may decrease prices to extend demand and market corrects itself.

Part 2: Similarly increase in supply from S1 to S2 in second diagram also decreases price to point C at P2 and then a few firms will contract supply and again prices will go up. Hence it is clear that market economy can correct itself.

However, this does not happen in the monopoly, as there is no competition firms may increase prices or decrease production to make prices go up and maintain there. Monopoly charges more prices than minimum average total costs making abnormal profits.

Every season prices of fruits and vegetables are determined by these forces.Increase in demand can be explained as shown in part 1 and increase in supply in part 2.

8 ---FIX Quantity