Answered: By market failure, the author means…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

In an article in the agriculture magazine

Choices,

Oregon State University economist JunJie Wu made the following observation about the conversion of farmland to urban development:

Land use provides many economic and social benefits, but often comes at a substantial cost to the environment. Although most economic costs are figured into land use decisions, most environmental externalities are not. These environmental "externalities" cause a divergence between private and social costs for some land uses, leading to an inefficient land allocation. For example, developers may not bear all the environmental and infrastructural costs generated by their projects. Such "market failures" provide a justification for private conservation efforts and public land use planning and regulation.

What does the author mean by market failures and inefficient land use

allocation?

Explain why the author describes inefficient land allocation as a market failure. Illustrate your argument with a graph showing the market for land to be used for urban development.

Source: JunJie Wu, "Land Use Changes: Economic, Social, and Environmental Impacts,"

Choices,

Vol. 23, No. 4, Fourth Quarter 2008, pp. 6-10.

By market failure, the author means

a situation that occurs when one person's consumption of a unit of a good means no one else can consume it.

a situation in which a

benefit

is present that affects someone who is not directly involved in the

consumption

of a good or service.

benefiting from a good without paying for it.

the tendency for a common resource to be underused.

a situation in which the market fails to produce the efficient level of output.

The author suggests the market for converting land to urban uses results in "inefficient land use allocation" because

the marginal

private

cost of converting land to urban uses is equal to the marginal

private

benefit from consuming land converted to urban uses.

the marginal social cost of converting land to urban uses is

less

than the marginal social benefit from consuming land converted to urban uses.

the marginal social benefit from consuming land converted to urban uses is greater than the marginal private benefit.

the marginal social cost of converting land to urban uses is greater than the marginal private cost.

the marginal private cost of converting land to urban uses is

less

than the marginal private benefit from consuming land converted to urban uses.

In particular, the author describes inefficient land allocation as a market failure because the market results in a quantity of land to be used for urban development that is

▼

less

greater

than the efficient level.

Show the market for land to be used for urban development graphically. Assume

Upper S 1

shows the marginal private cost of production and

Upper D 1

shows the marginal private benefit to consumers.

1.) Use the point drawing tool to identify the market equilibrium price and quantity of land to be used for urban development. Label this point 'Market equilibrium'.

2.) Use the line drawing tool to draw either a new supply curve

(Upper S 2

)

or a new demand curve

(Upper D 2

)

that incorporates the effect of the environmental externality. Properly label this line.

3.) Use the point drawing tool to indicate the efficient equilibrium price and quantity. Label this point 'Efficient equilibrium'.

Carefully follow the instructions above, and only draw the required objects.

Definition Video Definition Point where the demand and supply curves intersect. At the equilibrium price the quantity supplied of a good is equal to the quantity demanded. When the market is not in equilibrium, market surplus or market shortage occurs. The region that is above the price equilibrium indicates market surplus and the region below the price equilibrium indicates market shortage. Video

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