Economics questions on topic Market Failure, (please help to explain your answers. Thanks alot!):):):)

Question

1. Which of the following statements is correct when a competitive firm's production involves an external diseconomy.

A. The firm's output of the good is too large from society's viewpoint.

B. The market price of the good is too high from societ's viewpoint.

C. The optimal output of such a good from society's viewpoint is zero.

2. The introduction of charges on motorists entering a city results in a significant reduction in traffic congestion.

Which group Definitely suffers a net loss in welfare?

A. car users who abandon their journeys altogether.

B. car users who continue to enter the city centre.

C. car users who switch to public transport.

D. existing bus passengers.

Answer 1

1. A

2. A

For number 1 it has to be A. This is because competitive markets are price takers therefore can't really influence the price.  The other reason is that a factory may be producing at an efficient amount however it might not take account of the environment.  If we look at it in broader perspective it is over polluting so a pigouvian tax or something to compensate the injured will correct the problem.

for number 2 it would have to be A.  This is because people that abandon the journey all together can't participate in the market.  These are people that are in the DWL area.

Everyone gets a loss in welfare because person B has to pay more for the journey. Person C has to switch mode of transportation and Person D may have to wait longer lines.