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Microeconomics: Private and Public...

16th Edition
James D. Gwartney + 3 others
Publisher: Cengage Learning
ISBN: 9781305506893

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Chapter
Section
BuyFindarrow_forward

Microeconomics: Private and Public...

16th Edition
James D. Gwartney + 3 others
Publisher: Cengage Learning
ISBN: 9781305506893
Chapter ST4, Problem 4CQ
Textbook Problem
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Can markets generally be counted on to achieve desirable outcomes and adjust quickly and appropriately to changes, or are they rigid and subject to frequent problems that need correction? Discuss the potential problems with the market and how government intervention could potentially solve these problems.

To determine

Role of government to solve the potential problems with the market.

Explanation of Solution

Market is a place where goods and services are exchange between buyers and sellers, either directly or through intermediaries. There are two views related to the functioning of an economy. One view is related to the automatic stability, where the economy is directed by the market forces. Other view is that the economy is inherently unstable and government intervention in the form of macroeconomic policy is needed to correct the market equilibrium. Suppose there is a shock in an economy, then, the market adjust to a new equilibrium price and quantity by moving from one equilibrium point to another. There are many problems associated with a market such as asymmetric information, ignorance of public goods, and externalities, tendency towards monopoly and so on...

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