1)How does monopolistic competition differ from perfect competition?

2)How does the government attempt to encourage positive externalities?

3)Monopolistic competition is an industry characterized by what?

4)How do economists determine whether a market is an oligopoly?

1)A monopolistic market is very different from monopolistic competition. Just as perfect competition is different from monopolistic competition.

2)The government can generate positive externalities in two ways: (1) increasing supply and (2) increasing demand.

First, the government can provide subsidies to a business to encourage the business to produce more. By increasing research funding, the government could entice researchers to find a cure for a disease, like Ebola or cancer. Second, the government, itself, can increase supply by providing public goods through taxation. There was a growth in roads when the government began to provide these goods rather than individuals charging for a few roads (turnpikes, toll roads, etc.).

The government can also use subsidies to entice consumers. In order to foster the changeover to digital broadcast, the US government provides American consumers two $40 coupons to purchase the specialized boxes needed to convert over to digital. The government can also close the information gathering process for the consumer by providing the information themselves. Finally, the government can increase demand by requiring a certain activity. Under "Obamacare," all US citizens are to have some form of "sanctioned" health insurance or face a penalty on their tax return.

3)Monopolistic competition is an industry characterized by many firms selling a similar, but differentiated, product.

Monopolistic competition shares characteristics with pure competition, but in order for a company to survive in monopolistic competition, they have to make their product different in a certain way. They often attempt to convey the difference through advertising and innovation. If a company fails to advertise or innovate, it can easily leave the market, but another firm could easily take its place.

When you go down the laundry detergent aisle in the store, there are many brands of laundry detergent. You have an unlimited choice of powder, liquid, and now pods or packs from different companies. These companies hope to win your confidence in some way (a lower price, a sleek design, or an approval from some government or private agency).

4)The ways an economist determines if a market is an oligopoly is by looking at profit and the number of firms. An oligopoly's primary characteristic is being a market dominated by just a few firms. An oligopoly is easy to identify because around three to four companies produce up to 80% of the product output. A common example is the American Auto Industry, which is held by Ford, Chrysler, and GMC. After clearly defining the market, if output occurs via just a couple of companies then an oligopoly exists.