In a perfectly competitive industry, which of the following is a market signal to resource owners? The level of subsidies the industry receives?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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If you are asking whether the level of government subsidies that an industry receives is a market signal, it is not.  This is true for two reasons.

First of all, a subsidy is not something that the market does.  The market acts on the basis of supply and demand without outside interference.  By contrast, subsidies are imposed from outside the market.  They are imposed by governments without regard for supply and demand.

Second, the thing that is most often cited as a market signal is price.  Price is something that is determined (in most cases) by supply and demand.  Therefore, it is something that is created by the market and not by the government.  In addition, price can tell a firm a lot about an industry.  If prices are rising, firms that are not in the industry will conclude that there is money to be made by getting into that industry.  If prices are falling or are stable, firms will know that there is not really any room for new sellers in that market.

Therefore, the main market signal in perfect competition is price, not the level of subsidies.


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