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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

Explain whether each of the following government activities is motivated by a concern about equality or a concern about efficiency. In the case of efficiency, discuss the type of market failure involved.

a. regulating cable TV prices

b. providing some poor people with vouchers that can be used to buy food

c. prohibiting smoking in public places

d. breaking up Standard Oil (which once owned 90 percent of all oil refineries) into several smaller companies

e. imposing higher personal income tax rates on people with higher incomes

f. instituting laws against driving while intoxicated

To determine

Situations that explain efficiency and equity.

Explanation

Option (a): In the first case, the market failure is due to market power. The market power is the ability of a single person or a firm (or small group) to have a substantial influence on market prices. Regulating cable tv price will help to maintain the efficiency and optimally allocate the cable tv for all.

Option (b): Providing some poor people with vouchers that can be used to buy food help to maintain an equity situation.

Option (c): In this case, the market failure is due to externality. The externality is the impact of one person's actions on the well-being of a bystander...

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