Two widget producers, A and B, operate in perfectly competitive input and output markets. Firm A uses capital () and labour () with . Firm B uses only labour with . Efficiency of input allocation can be improved by:
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Two widget producers, A and B, operate in perfectly competitive input and output markets. Firm A uses capital (k) and labour (l) with f₁(k₁,l₁)=(k₁ l₁)^(1/3). Firm B uses only labour with f₂(l₂)=√(l₂)/(1+k₁). Efficiency of input allocation can be improved by: (A) imposing a tax on capital use (B) merging firms A and B (C) providing a subsidy on labour use to firm A (D) all of the above
Also written as: Two widget producers, A and B, operate in perfectly competitive input and output markets. Firm A uses capital (k) and labour (l) with f_1(k_1,l_1)=(k_1 l_1)^(1/3). Firm B uses only labour with f_2(l_2)=sqrt(l_2)/(1+k_1). Efficiency of input allocation can be improved by:
Market failure, externalities and public goods has come up 114 times in 7 exams since 2006.
This question is on Pigouvian taxes and corrective policy, part of Market failure, externalities and public goods in Microeconomics.
Using taxes or subsidies to make people face the social cost of their actions.
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Question from the DSE 2016 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.