Multiple Choice
Which of the following is an example of the government promoting market stability in response to externalities?
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7. Externalities
Public Solutions to Externalities
Multiple Choice
Which of the following is NOT one of the sources of natural market power?
A
Economies of scale
B
Control of a key resource
C
Government regulation
D
Network effects
Verified step by step guidance1
Understand the concept of natural market power: it arises when a firm can maintain a dominant position in the market due to inherent characteristics of the market or the firm's resources, rather than through external interventions.
Identify common sources of natural market power: these typically include economies of scale (where larger firms have lower average costs), control of a key resource (exclusive access to essential inputs), and network effects (where the value of a product increases as more people use it).
Recognize that government regulation is not a natural source of market power; instead, it is an external factor imposed by policy or law that can create or limit market power.
Compare each option to the definition of natural market power to determine which one does not fit: economies of scale, control of a key resource, and network effects are natural sources, while government regulation is not.
Conclude that the correct answer is the option that is not a natural source of market power, which is government regulation.
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