Multiple Choice
Which of the following is an example of a public solution to externalities where the government creates barriers to entry?
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7. Externalities
Public Solutions to Externalities
Multiple Choice
Granting a pharmaceutical company a patent for a new medicine will lead to:
A
lower prices for the medicine due to increased competition
B
immediate entry of competitors producing the same medicine
C
temporary monopoly power for the company, allowing it to set higher prices
D
a permanent ban on other companies researching similar medicines
Verified step by step guidance1
Understand the role of a patent in microeconomics: a patent grants exclusive rights to a company to produce and sell a new product, preventing others from entering the market with the same product for a limited time.
Recognize that this exclusivity creates a temporary monopoly, meaning the company faces no direct competition for that product during the patent period.
Analyze the effect of this temporary monopoly on prices: without competition, the company can set prices higher than in a competitive market to maximize profits.
Note that the patent does not lead to immediate entry of competitors producing the same medicine, as they are legally restricted from doing so.
Understand that the patent is temporary, so it does not create a permanent ban on other companies researching similar medicines; after the patent expires, competition can increase, potentially lowering prices.
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