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Market structures, externalities and profit maximizing

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a. Describe an externality created by a firm in your state.

b. What are the social costs associated with the externality?

c. List three remedies that the federal, state, or local government could introduce to reduce the problem.

d. Why is it important for a profit maximizing firm to consider market structure in determining the price and output of its product or service?

e. How do you determine the profit maximizing level of production in terms of price, marginal revenue and marginal cost for the firm you are considering?

f. Has the industry your workplace ever shifted market structures? Discuss. If you do not work at a private-sector firm, then you could discuss a workplace you are familiar with.

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Solution Preview

a. A common externality created by firms is pollution. If a firm is not forced to shoulder any of the social costs of pollution, it will not factor those costs into the level of output it chooses to produce. Consequently, the firm will produce too much output (and pollution) for society's good.
b. The social costs of pollution include the cost of cleaning up the environment, the increased cost of medical treatment due to ...

Solution Summary

Answers to six common short-answer questions about externalities, social costs, profit maximization and market structure.