3.8.6 Market imperfections

• What is a monopoly in terms of market imperfections?

  Single seller controls supply
• A monopoly is characterized by high barriers to entry and the ability of a single seller to act as a price maker.


  True
• What type of market imperfection involves a small number of large sellers dominating the market?

  Oligopoly
• In a monopsony, a single buyer controls the entire market demand.
• Network effects can entrench a monopoly or oligopoly by increasing the value of the product as more users join.


  True
• Barriers to entry can result in a monopoly or oligopoly.
• In some markets, the value of a product increases as more people use it, creating a monopoly
• What is a common barrier to entry that can lead to a monopoly?

  Large start-up costs
• What are two consequences of information asymmetry?

  Moral hazard and adverse selection
• Monopolies typically charge higher prices and produce lower output
• Government intervention is sometimes necessary to address market imperfections.

  True
• Match the type of market imperfection with its definition:

  Monopoly ↔️ Single seller controls market supply

  Oligopoly ↔️ Small number of large sellers

  Monopsony ↔️ Single buyer controls market demand

  Information Asymmetry ↔️ One party has more information
• A monopoly exists when a single seller dominates the market
• A monopsony involves a single buyer dominating market demand
• What type of market imperfection results from barriers to entry?

  Monopoly or oligopoly
• What market imperfection arises when the value of a product increases as more people use it?

  Network effects
• Market imperfections lead to efficient outcomes compared to a perfectly competitive market.

  False
• What type of competition may oligopolies engage in rather than price competition?

  Non-price competition
• Match the government strategy with its definition:

  Competition Laws ↔️ Regulations that prevent anti-competitive behavior

  Price Controls ↔️ Government sets maximum or minimum prices

  Regulation ↔️ Rules that firms must follow
• Market imperfections refer to deviations from the ideal of a perfectly competitive market.
• Information asymmetry occurs when one party has significantly more information than the other.
• Order the causes of market imperfections based on their role in creating market structures.

  1️⃣ Barriers to Entry

  2️⃣ Economies of Scale

  3️⃣ Network Effects

  4️⃣ Information Asymmetry
• What is the term for the situation where one party in a transaction has significantly more information than the other?

  Information asymmetry
• What type of market structure can economies of scale lead to?

  Monopoly or oligopoly
• Information asymmetry can lead to adverse selection or moral hazard.


  True
• Network effects occur when the value of a product increases as its usage
• Market imperfections lead to more efficient outcomes than perfect competition.

  False
• What is a consequence of a monopsony?

  Suppliers receive lower incomes
• Market imperfections can prevent the market from achieving the socially optimal outcome
• What happens in a monopsony?

  Single buyer dominates demand
• An oligopoly occurs when a few large sellers control the market.


  True
• Information asymmetry happens when one party has significantly more information than the other.

  True
• Economies of scale occur when large firms can produce at lower average costs
• What are two inefficient outcomes of information asymmetry?

  Adverse selection and moral hazard
• A monopoly results in higher prices and lower output
• Monopsonies result in buyers paying less than the competitive price.


  True
• Government subsidies encourage production or consumption
• What is one drawback of nationalization as a government strategy?

  Less efficient than private ownership