1. An externality is a cost or benefit that accrues to a party that is not an active participant in the specific transaction. Drinking and driving is an example of a negative consumption externality since the social cost is greater than the private cost. Technological innovation is an example of a positive production externality because the social benefit of the innovation is greater than the cost needed to produce that innovation. Externalities affect economic efficiency and equilibrium by putting pressure on public policy to protect or punish those responsible for externalities (Bekar, n.d.).
2a. perfect competition, monopoly, monopolistic competition and oligopoly (Gitman & McDaniel, 2009)
2b. perfect competition = large number of small sellers + similar products + excellent access/quality of information + low barriers to market entry/exit (Gitman & McDaniel, 2009)
2c. Perfect competition has many sellers, monopoly has one dominant seller. Perfect competition has easily substitutable products; monopoly has products that cannot be easily substituted. Perfect competition has low entry/exit market barriers; monopoly has high entry/exit market barriers (Gitman & McDaniel, 2009).
2d. oligopoly = few sellers, many buyers (Gitman & McDaniel, 2009)
2e. It is difficult for markets to shift from one structure to another. It is difficult for perfect competition to shift to oligopoly or monopoly because other firms will enter and maintain the large sellers. Similarly, the barriers to entry of an oligopoly or monopoly will keep those markets from shifting to perfect competition. It requires a large external shift, such as a new technology, to bring about change in structure (Gitman & McDaniel, 2009).
...