Unit 6: Market Failure and the Labor Market
What happens when a price misses a real cost or benefit to somebody else, and how wages get set in the market for work.
7 topics · 23 questions
Each topic is a path, not a menu: work down it in order and every question builds on the one above. Click any of them to watch the answer draw itself.
Negative Externalities
- How it worksHow does a negative externality drive a wedge between a firm's private cost and society's true cost?
- Worked exampleFind the efficient output level when the private marginal cost curve MC = 10 + Q sits 5 dollars below the social marginal cost at every quantity.
- Common mistakeWhy doesn't a market left alone automatically account for costs it imposes on people outside the transaction?
- Going furtherWhat happens to a factory's pollution once the government places a tax equal to the external cost?
Your turn1 of 2
A market for a good has demand P = 54 - 2Q. The private marginal cost curve is MC = 14 + Q, which sits 4 dollars below the social marginal cost at every quantity. What is the efficient output level?Positive Externalities
- How it worksHow does a positive externality mean the free market produces less of a good than the socially optimal amount?
- Common mistakeWhy doesn't the market automatically produce enough vaccination or enough education on its own?
- Going furtherWhat happens to the quantity produced of a good with a positive externality once the government pays a subsidy on it?
Your turn1 of 2
Why does getting a flu shot protect people you'll never even meet?Public Goods and the Free-Rider Problem
- How it worksHow do the two properties of a public good, non-excludability and non-rivalry, create the free-rider problem?
- Common mistakeWhy isn't a crowded public park an example of a pure public good?
- Going furtherWhat happens to national defense spending if it were left entirely to private voluntary contributions?
Your turn1 of 2
Why would a neighborhood fireworks show never get built if it were left to voluntary donations alone?Common Resources and the Tragedy of the Commons
- How it worksHow does a resource being rival but non-excludable lead each user to overconsume it?
- Common mistakeWhy isn't the tragedy of the commons solved just by people caring more about a shared resource?
- Going furtherWhat happens to an overfished ground once the government issues a limited number of tradable fishing permits?
Your turn1 of 2
Why does an open ocean fishing ground get overfished even though every fisherman would rather it stay healthy?The Demand for Labor
- How it worksHow does the marginal revenue product of labor decide how many workers a firm wants to hire at a given wage?
- Worked exampleFind the profit-maximizing number of workers to hire when the wage is 15 dollars and marginal revenue product falls from 25 to 10 dollars per worker.
- Common mistakeWhy isn't the demand for labor driven by how hard a worker is willing to work rather than the value that work adds?
Your turn1 of 2
A firm's marginal revenue product of labor is MRP = 35 - 2L dollars, where L is the number of workers hired. The wage is 15 dollars. What is the profit-maximizing number of workers to hire?The Supply of Labor and Wage Determination
- How it worksHow does the labor market find an equilibrium wage where labor supply meets labor demand?
- Common mistakeWhy doesn't a job's wage get set by how important or hard the work feels rather than by supply and demand for that skill?
- Going furtherWhat happens to the equilibrium wage in a market once a new wave of workers gains the same skill?
Your turn1 of 2
In a labor market, labor demand is Qd = 129 - 2W and labor supply is Qs = -12 + 2W. What is the equilibrium wage?The Minimum Wage in the Labor Market
- How it worksHow does a minimum wage set above the equilibrium wage create a surplus of labor, meaning unemployment?
- Worked exampleFind the size of the labor surplus when a 15 dollar minimum wage is set and labor demand is Qd = 100 - 2W while labor supply is Qs = -20 + 4W.
- Common mistakeWhy doesn't a higher minimum wage help every worker equally across a whole industry?
- Ties togetherHow does a minimum wage set above the equilibrium wage work exactly like a price floor set above the equilibrium price?
Your turn1 of 2
A minimum wage of 23 dollars is set on a labor market where labor demand is Qd = 83 - 4W and labor supply is Qs = -11 + 2W. What is the size of the labor surplus, meaning unemployment, at this minimum wage?