4. Conditions preventing economic efficiency In some situations, markets fail to achieve efficiency. The following table describes a number of market failures that Hannah encounters. For each of the examples given in the table, identify the condition that prevents an efficient allocation of resources. (Hint: Use each condition only once.) Example Hannah's asthma attacks are often triggered by secondhand smoke; the smokers only have to bear their own health costs and the price of the cigarettes. The asthma medication prescribed by Hannah's doctor was recently introduced, and thus the creators hold a patent that prohibits others from selling the drug. As a result, the price of the medication is far higher than the marginal cost of producing it. Show Transcribed Text The asthma medication prescribed by Hannah's doctor was recently introduced, and thus the creators hold a patent that prohibits others from selling the drug. As a result, the price of the medication is far higher than the marginal cost of producing it. Hannah recently went to the pharmacy with a new prescription for asthma medication. Her doctor prescribed it, and therefore she plans to have the prescription filled, but Show Transcribed Text Hannah recently went to the pharmacy with a new prescription for asthma medication. Her doctor prescribed it, and therefore she plans to have the prescription filled, but because Hannah has no pharmaceutical knowledge, she wonders whether there might be other medications that would be better or cheaper. Once the patent on Hannah's asthma medication expires, other pharmaceutical Show Transcribed Text Aa Aa Once the patent on Hannah's asthma medication expires, other pharmaceutical manufacturers will be able to sell generic versions of the drug without having to bear any of the up-front development costs. Because other firms get a "free ride" off the initial firm's investment, the total investment in developing new drugs is less than the socially optimal amount. Condition Public goods Imperfect competition Imperfect information. Externalities Externalities Imperfect competition Imperfect information Public goods Externalities Imperfect competition Imperfect information Public goods Imperfect information Public goods Externalities Imperfect competition

4. Conditions preventing economic efficiency In some situations, markets fail to achieve efficiency. The following table describes a number of market failures that Hannah encounters. For each of the examples given in the table, identify the condition that prevents an efficient allocation of resources. (Hint: Use each condition only once.) Example Hannah's asthma attacks are often triggered by secondhand smoke; the smokers only have to bear their own health costs and the price of the cigarettes. The asthma medication prescribed by Hannah's doctor was recently introduced, and thus the creators hold a patent that prohibits others from selling the drug. As a result, the price of the medication is far higher than the marginal cost of producing it. Show Transcribed Text The asthma medication prescribed by Hannah's doctor was recently introduced, and thus the creators hold a patent that prohibits others from selling the drug. As a result, the price of the medication is far higher than the marginal cost of producing it. Hannah recently went to the pharmacy with a new prescription for asthma medication. Her doctor prescribed it, and therefore she plans to have the prescription filled, but Show Transcribed Text Hannah recently went to the pharmacy with a new prescription for asthma medication. Her doctor prescribed it, and therefore she plans to have the prescription filled, but because Hannah has no pharmaceutical knowledge, she wonders whether there might be other medications that would be better or cheaper. Once the patent on Hannah's asthma medication expires, other pharmaceutical Show Transcribed Text Aa Aa Once the patent on Hannah's asthma medication expires, other pharmaceutical manufacturers will be able to sell generic versions of the drug without having to bear any of the up-front development costs. Because other firms get a "free ride" off the initial firm's investment, the total investment in developing new drugs is less than the socially optimal amount. Condition Public goods Imperfect competition Imperfect information. Externalities Externalities Imperfect competition Imperfect information Public goods Externalities Imperfect competition Imperfect information Public goods Imperfect information Public goods Externalities Imperfect competition

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter1: Ten Principles Of Economics

Section: Chapter Questions

Problem 7QR

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