1. Explain how a system of perfectly competitive markets can achieve efficiency.
2. How does the exercise of monopolistic power prevent efficiency from being attained?
3. Describe how taxes can affect incentives and cause losses in net benefits.
4. Show the losses in well-being each year that would result from a law limiting sales of television sets to 100,000 per year. Show the effect on the price, marginal social benefit, and marginal social cost of television sets. Show the net loss in well-being that will result from a complete ban on the sales of television sets.
5. Define Pareto optimality. Use the definition of Pareto optimality to demonstrate that the market for buying and selling owner-occupied housing follows the requirements for Pareto optimality. Why is this type of exchange Pareto optimal? On the other hand, the government's use of eminent domain is thought to violate Pareto optimality. The government still pays the home owner fair market value. Nevertheless, use the definition of Pareto optimality to show that the use of eminent domain violates Pareto's guidelines for efficient exchange