1. The presumption of efficiency for capitalism is based on the model of perfect
ID: 1140616 • Letter: 1
Question
1. The presumption of efficiency for capitalism is based on the model of perfect competition. Explain the assumptions underlying the model of perfect competition. Provide an example showing how the US economy diverges from each of these assumptions.
2. One common tool employed to judge the success of differing economic system is the rate of growth of output. Explain how this provides a good tool for comparison and how it provides a bad tool for comparison.
3. Market failure are central to many explanations for required government action in capitalist economies. Explain what a market failure is and provide an example. How could government action recify this situation?
Please write thorougly and long enough that I can understand.
Explanation / Answer
Ans
1 There are no. Of producers and sellers so that one is not enough to affect price. E. G a single farmer is too small to dictate prices of goods. This assumption is not found in usa where companies like Google, Facebook, Amazon etc are too big so that they can easily affect prices of their products
The goods are homogenous so that no firm has loyal customers. In other words buyers don't prefer goods of one firm. Otherwise firms will have power to affect prices. Again in usa we find brands have unique products and not exactly same products
There is perfect knowledge so that buyers know the prices charged by all firms and their products. Similarly sellers know what buyers pay to each seller and what are prices of resources. This is necessary to prevent firms and customers paying and charging different prices. But this is not found practically in usa. Nobody has perfect information in usa
There is free entry and exit of firms so that no firm earns economic profits in longrun. If some makes profit others enter industry which decreases price and raises cost do that profit falls. Due to customer loyalty to products of established firms, copyrights, patents etc there is no free entry and exit in usa
2 it is good in the sense that good systems result in more output and bad systems lead to low output. But quite often more output may lead to production of more pollution, more inequality, more productions of weapons for war etc. In this sense it is not ok
3 market failure is a situation in which market leads to inefficiency in use of resoruces. E. G it may produce too much pollution. Govt can penalize pollution by taxes It can provide public goods, merit goods etc
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