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Chapter Review Chapter 11: Introduction to Imperfect Markets

  1. By and large, private markets allocate resources efficiently. However, in a number of areas they do not, as in the cases of imperfect competition, imperfect information, externalities, and public goods.
  2. Economists identify four broad categories of market structure: perfect competition, monopoly, oligopoly, and monopolistic competition.
  3. When competition is imperfect, the market will produce too little of a good and the market price will be too high.
  4. The basic competitive model assumes that participants in the market have perfect information about the goods being bought and sold and their prices. However, information is often imperfect.
  5. Individuals and firms produce too much of a good with a negative externality, such as air or water pollution, since they do not bear all the costs. They produce too little of a good with positive externalities since they cannot receive all the benefits.
  6. Public goods are goods that cost little or nothing for an additional individual to enjoy, but that cost a great deal to exclude an individual from enjoying them. National defense and lighthouses are two examples. Free markets underproduce public goods.
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