Question

Chapter I. Ten Principles of Economics

1. Explain the two main causes of market failure and give an example of each (6th edition). Relate this to examples in your home country Honduras.
2. Your roommate is a better cook than you are, but you can clean more quickly than your roommate can. If your roommate did all the cooking and you did all the cleaning, would your chores take you more or less time than if you divided each task evenly? Give a similar example of how specialization and trade can make two countries both better off.

Answer 1

Market failure occurs when a market is unable to manage its resources efficiently due to the breakdown of price mechanism caused by externality or market power. An externality is an impact of one’s action into another bystander. The influence could be positive or negative. An example of positive externality is when a father buys a television will bring benefit to other family members to watch movie or show aired. In another case like driving a car creates air pollution can be classified as negative externality. This is external cost; it tends to bring losses into a community/society. The driver himself does not have to pay for the social cost as he only pays for driving (private) cost. In this case, society pays the cost of dealing with air pollution. Therefore, the car pollution is the negative externality. Negative externality occurs only when the social cost is greater than private cost. As a result, the driver does not take into account the externality by ignoring the social cost. Hence, market failure occurs.

Market failure can be linked to demand and supply. Those firms who have significant power can control the market . They can become price makers and can manipulate the prices. The firms who are weak become price takers and have to accept the price decided by strong firms. Oligopoly forming cartel is  an example of such situation where market failure occurs and equilibrium is unbalanced.

Externalities Closed Markets, Technological Failure, Market Manipulation, Anti Competitive Practices are all examples of Market Failures.

Honduras is a low middle-income country that faces major challenges, with more than 66 percent of the population living in poverty in 2016, according to official data. Honduras suffer from high crime, corruption, weak infrastructure, mainly dependent on US Economy and has significant economic informality. Corruption leads  to market failures, poorer countries like Honduras are more likely to face market failures and hence greater incidence of government intervention and with it increase likelihood of bureaucratic corruption.

2. It will take less time because because you would specialize in things that you have a comparative advantage in. Comparative advantage is an economic term that refers to an economy's ability to produce goods and services at a lower opportunity cost than that of trade partners. Due to this the economy can enjoy benefits of economies of scale and can produce more of goods in which it specializes and can export it also and can import the goods from its trading partner in which it lacks the ability to produce on its own, thus both economies are benefited.

Example.Country A specializes in production of pullovers due to its climatic conditions, labor force and technological factors. Country B specializes in production of wheat due to its geographical location and climatic conditions. Country A can provide pullovers, woolen garments to Country B and Country B can provide wheat to Country A. In this way A can satisfy the food requirements of its citizens and B can save its citizens from severe cold conditions.