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Principles of Economics- Mankiw (5th) 374

Principles of Economics- Mankiw (5th) 374 - 384 PA R T F I...

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384 PART FIVE FIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY The product-variety externality: Because consumers get some consumer surplus from the introduction of a new product, entry of a new firm conveys a positive externality on consumers. The business-stealing externality: Because other firms lose customers and profits from the entry of a new competitor, entry of a new firm imposes a negative externality on existing firms. Thus, in a monopolistically competitive market, there are both positive and nega- tive externalities associated with the entry of new firms. Depending on which ex- ternality is larger, a monopolistically competitive market could have either too few or too many products. Both of these externalities are closely related to the conditions for monopolis- tic competition. The product-variety externality arises because a new firm would offer a product different from those of the existing firms. The business-stealing ex-
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