The four major sources of market failure are market power,incomplete information,externalities and public d We know from the study of market structures that market power le not equal marginal cost. In these situations,the producer is pmducing to little.Consumers could be made better off by redirecting inputs into the production of the good produced under a competitive market structure. thereby lowering price until price is equal to marginal cost Incomplele production or the change in utility from changes in consumption. Eithe too much or too little (at the extreme,none)is produced and consumed. Externalities occur when a consumption or production activity influences other oonsumption of production activities.and these effects are not reflected in market prices Public tha can be cons umed at prices below marginal st (at the extreme,freely)because consumers cannot be excluded.In these four cases,prices do not send the proper signals to either producers or consumers to increase or decrease production or consumption.Thus.the market mechanism cannot equate social marginal costs with social marginal benefits 二、EXERCISES 1.Suppose gold (G)and silver (S)are substitutes for each other because both ges against ealso t suppli of bo rixed in the short run o75,and 300).and that the demands for gold an Suppo tt证 ar silver are given by the following equations: P6=975-QG+0.5Ps and Pg=600-Qg+0.5PG What are the equilibrium prices of gold and silver? In the short run,the quantity of gold,is fixed at 75.Substitute into the demand equation for gold: Pc=975.75+0.5P In the short run,the quantity of silver.Os,is fixed at 300.Substituting Q into the demand equation for silver: Ps=600-300+0.5PG Since we now have two equations and two unknowns,substitute the price of gold into the price ofsilver demand function and solve for the price ofsilver: Ps=600.300+(0.5900+0.5Ps)=$1,000 Now substitute the price of silver into the demand for gold function Pc=975.75+(0.501,000)=$1,400 Suppose a new discovery of gold doubles the quantity supplied to 150. How will this discovery affect the prices of both gold and silver? The four major sources of market failure are market power, incomplete information, externalities, and public goods. We know from the study of market structures that market power leads to situations where price does not equal marginal cost. In these situations, the producer is producing too little. Consumers could be made better off by redirecting inputs into the production of the good produced under a competitive market structure, thereby lowering price until price is equal to marginal cost. Incomplete information implies that prices do not reflect either the marginal cost of production or the change in utility from changes in consumption. Either too much or too little (at the extreme, none) is produced and consumed. Externalities occur when a consumption or production activity influences other consumption of production activities, and these effects are not reflected in market prices. Public goods are goods that can be consumed at prices below marginal cost (at the extreme, freely) because consumers cannot be excluded. In these four cases, prices do not send the proper signals to either producers or consumers to increase or decrease production or consumption. Thus, the market mechanism cannot equate social marginal costs with social marginal benefits. 二、EXERCISES 1. Suppose gold (G) and silver (S) are substitutes for each other because both serve as hedges against inflation. Suppose also that the supplies of both are fixed in the short run (QG = 75, and QS = 300), and that the demands for gold and silver are given by the following equations: PG = 975 - QG + 0.5PS and PS = 600 - QS + 0.5PG. a. What are the equilibrium prices of gold and silver? In the short run, the quantity of gold, QG, is fixed at 75. Substitute QG into the demand equation for gold: PG = 975 - 75 + 0.5PS. In the short run, the quantity of silver, QS, is fixed at 300. Substituting QS into the demand equation for silver: PS = 600 - 300 + 0.5PG. Since we now have two equations and two unknowns, substitute the price of gold into the price of silver demand function and solve for the price of silver: PS = 600 - 300 + (0.5)(900 + 0.5PS ) = $1,000. Now substitute the price of silver into the demand for gold function: PG = 975 - 75 + (0.5)(1,000) = $1,400. b. Suppose a new discovery of gold doubles the quantity supplied to 150. How will this discovery affect the prices of both gold and silver?