In a perfectly competitive labor market, the equilibrium wage is determined by the interaction of labor supply and demand. Individual firms take the wage rate as given.
A firm maximizes profit by hiring a resource up to the point where the marginal revenue product (MRP) equals the resource’s price. This ensures that the cost of hiring is covered by the revenue generated.
Market failure occurs when the allocation of goods and services is not efficient. Negative externalities, like pollution, result in overproduction and harm third parties, requiring intervention.
Public goods are non-excludable (no one can be prevented from using them) and non-rivalrous (one person’s use does not reduce availability for others). Examples include national defense and street lighting.
Imposing a tax equal to the external cost internalizes the externality, meaning the producer considers the social cost in production decisions, reducing overproduction and achieving efficiency.
