The market only stabilizes where demand is equal to supply and an equilibrium price is determined. Many sellers meet and each produces what he/she is best at hence quality goods are sold by willing sellers to willing buyers at an agreed price (Harford, 61-65). Q2: What does Harford mean when he says that in competitive markets, "Things are going to the right people”? In a competitive market, there is free allocation of resources although the consumers are the ones who determine how resources are to be allocated through their purchasing power. All the players in the market have a self interest; the producers maximize profits, the owners of factors of production get rewards, while the consumers get maximum utility. The consumers demand goods thus forcing producers to produce the goods and the producers in turn allocate factors of production in the production process. All the players in the market thus get what they deserve; profits, rewards, and utility. The buyers get what they can afford based on their income and wealth (Harford, 61-79). Q3: When Harford talks about the absence of a market for schools, he argues that people find a way to trade in access to schools---they use the property market. Does this mean that, in fact, there is a market for schools, and that we should expect provision of schooling to be efficient? Provision of education is not profitable to businessmen hence there is no market for schools. However, where property market is thriving there is establishment of schools as businessmen cater for their needs or arising out of economies of scale. The workers who work in those properties require education hence more schools are established for easier access. There is market for schools but they are underprovided hence government intervention is needed to ensure all citizens have access to schools especially in poor areas where no industries exist. Q4: What is an externality? Give an example of an externality, and show how its presence makes the price of an activity diverge from the cost of the activity. An externality is an unintended consequence that results from production and consumption in the market thus affecting others not directly involved in the process. For example, the consumption of demerit goods such as cigarettes gives the individual satisfaction but affects the health of others who inhale the smoke. This is an additional cost to the society which is not included while determining prices in the market hence the price of the activity is lower than the actual cost of the activity (Harford, 79-108). Q5: What is a positive externality? Give an example of one, and show how in "complete, free and competitive markets" (to use Harford's phrase), too little of this good would be produced and traded. A positive externality occurs when consumption or production of a good is beneficial to other members of the society who are not involved in the transaction such that the social cost is less than private cost. For example, research and development is beneficial to all. This means the producer engaging in research and development incurs high costs and in a free market, other producers will benefit from information or ideas generated from this research to improve their products. It therefore discourages producers from investing in research since the private cost is higher than social cost. More of the product will thus be needed than is available in the market. Q6:
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