Chapter 9: Problem 2

Classify the following as a government-enforced barrier to entry, a barrier to entry that is not government-enforced, or a situation that does not involve a barrier to entry. a. A city passes a law on how many licenses it will issue for taxicabs b. A city passes a law that all taxicab drivers must pass a driving safety test and have insurance c. A well-known trademark d. Owning a spring that offers very pure water e. An industry where economies of scale are very large compared to the size of demand in the market

Short Answer

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a. Government-enforced barrier to entry b. Government-enforced barrier to entry c. Non-government enforced barrier to entry d. Non-government enforced barrier to entry e. Non-government enforced barrier to entry

Step by step solution

Situation a: Number of licenses for taxicabs

This situation is a government-enforced barrier to entry since the city government is passing a law restricting the number of licenses available for taxicabs, limiting the number of taxi businesses that can operate in the city.

Situation b: Safety test and insurance requirements for taxicab drivers

This situation is also a government-enforced barrier to entry because the city is passing a law on the requirements for taxicab drivers, which could potentially limit the number of drivers and businesses that can enter the taxi market, especially if the test is difficult to pass or the insurance requirements are costly.

Situation c: A well-known trademark

This situation represents a non-government enforced barrier to entry. A well-known trademark can create a barrier to entry for competitors, as it gives the trademark owner reputational advantage and customer recognition that new entrants may struggle to achieve. However, it is not a barrier enforced by the government.

Situation d: Owning a spring with very pure water

This situation is a non-government enforced barrier to entry because it represents a unique natural resource that is difficult for other firms to access or replicate. Competing businesses would need access to a similar resource or invest in expensive water treatment processes in order to offer the same quality product as the firm owning the spring.

Situation e: Industries with large economies of scale compared to market size

This situation is a non-government enforced barrier to entry. Industries with large economies of scale compared to market size require large investments and potentially lower prices (due to increased efficiency) to successfully enter and compete. New entrants would have to invest significant capital, while also facing the challenge of acquiring customers in a limited market.

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