Question

1. Think of some markets in which competitive conditions exist; then think of some in which noncompetitive conditions exist. Are equilibrium prices established in both? Explain.

2. What are some examples of public goods that would not be produced unless governments decided to demand them?

Answer 1

1. A competitive equilibrium is an equilibrium condition where the interaction of profit-maximizing producers and utility-maximizing consumers in competitive markets with freely determined prices arrive at an equilibrium price. At this equilibrium price, the quantity supplied is equal to the quantity demanded.

While the basic supply and demand model is based on individual consumer and firm behavior, the competitive equilibrium model is based on the behavior of aggregate consumers and firms in competitive markets. It can be used to predict the equilibrium price and total quantity in the market, as well as the quantity consumed by each individual and output per firm.

Competitive equilibrium is a state of market, characterized by a set of prices and an allocation of commodities, such that at equilibrium prices, each agent maximizes his objective function subject to his technological limitations and resource constraints, and the market clears the aggregated supply and demand for the products in question.

In a capitalist market, vital regulatory functions, such as ensuring stability, competency and fairness are left to the mechanisms of pricing. Thus, competitive equilibrium theory of equilibrium prices acquired a prominent place in mathematical economics. With the advent of the Internet, extensive research has been done at the intersection of computer science and economic theory.

The defining characteristic of competitive equilibrium is that it's competitive. By contrast, a general equilibrium's defining characteristic is that it is an equilibrium on more than one market; as opposed to the partial equilibrium in which we hold at least one price fixed and analyze the response of other markets/prices only. The difference between the two types of equilibriums is all about the emphasis. Any general equilibrium is a competitive equilibrium, but not any competitive equilibrium is necessarily general equilibrium.

2.

Economists have a strict definition of a public good, and it does not necessarily include all goods financed through taxes. To understand the defining characteristics of a public good, first consider an ordinary private good, like a piece of pizza. A piece of pizza can be bought and sold fairly easily because it is a separate and identifiable item. However, public goods are not separate and identifiable in this way.

Instead, public goods have two defining characteristics: they are nonexcludable and nonrivalrous. The first characteristic, that a public good is nonexcludable, means that it is costly or impossible to exclude someone from using the good. If Larry buys a private good like a piece of pizza, then he can exclude others, like Lorna, from eating that pizza. However, if national defense is being provided, then it includes everyone. Even if you strongly disagree with America’s defense policies or with the level of defense spending, the national defense still protects you. You cannot choose to be unprotected, and national defense cannot protect everyone else and exclude you.

The second main characteristic of a public good, that it is nonrivalrous, means that when one person uses the public good, another can also use it. With a private good like pizza, if Max is eating the pizza then Michelle cannot also eat it; that is, the two people are rivals in consumption. With a public good like national defense, Max’s consumption of national defense does not reduce the amount left for Michelle, so they are nonrivalrous in this area.

A number of government services are examples of public goods. For instance, it would not be easy to provide fire and police service so that some people in a neighborhood would be protected from the burning and burglary of their property, while others would not be protected at all. Protecting some necessarily means protecting others, too.