1. How does the market for natural resources function?

There are two types of natural resources. Nonrenewable natural resources, like oil and natural gas, can be used only once and cannot be replaced. Renewable resources, like trees and animals, can replenish themselves.

Since the amount of a nonrenewable resource is fixed, the more that is used in the present, the less that is available in the future. As the price for the resource increases, more is extracted now, leaving less for the future. As more is extracted, the supply for the future shifts up, because costs increase as producers must extract resources from less and less accessible places. Since the price of the resource will likely be higher in the future, the resource owner must decide whether to extract the resource today or save it for the future. The supply and demand for nonrenewable resources limit the rate at which the nonrenewable resources are consumed.

Renewable resources are not fixed in quantity; however, they cannot be consumed too rapidly, or they won't be able to reproduce themselves. The role of the market for renewable resources is to determine a price at which the quantity of the resource used is just sufficient to enable the resource to renew itself at a rate that best satisfies society's wants.

2. Why might a market not allocate goods and services efficiently?

Economists agree that perfectly competitive markets are usually economically efficient: they produce the right amount of output and allocate the right amount of resources to alternative uses. Market failure is the failure of the market system to make economically efficient decisions. In the real world, resource markets sometimes fail to produce the economically efficient output or fail to allocate resources efficiently because of externalities and poorly defined property rights.

3. How do global environmental problems differ from domestic environmental problems?

The lack of property rights is a major problem in global environmental problems. Nobody owns the air that blows from the United States into Canada. If U.S. power plant emissions cause acid rain in Canada, there is no market or government mechanism that allows the Canadians to restrict the behavior of U.S. firms, unless the Canadian government can convince the U.S. government to intervene. Solving global pollution problems requires governments to cooperate, sometimes in ways that aren't beneficial to their own interests.

4. Why are illicit drugs such a problem?

The government's objective is to reduce the use of drugs and the crime associated with drug use. However, current measures concentrate on reducing the supply of drugs by increasing the costs. This policy reduces the number of suppliers and increases the barriers to entry, thereby ensuring that the remaining suppliers control the market and earn positive economic profits.

Instead of focusing on reducing the supply, it might be more effective to focus on decreasing demand. The demand for illegal drugs by hard core addicts is very price inelastic, while the demand for illegal drugs by experimental users is price elastic. Any policy designed to decrease drug use must take both types of markets into account.

5. What is discrimination?

Discrimination is the practice of treating people differently based on a characteristic having nothing to do with that market. In the labor market, discrimination occurs when some factor not related to the individual's value to the firm affects the wage rate someone receives.

6. Are discrimination and freely functioning markets compatible?

In a freely functioning labor market, discrimination should not exist; there is a profit to be made in not discriminating. Of course, discrimination does exist. One source of labor market discrimination is employers' personal prejudice. Hiring people on the basis of personal prejudice adds to employers' costs and is not compatible with free markets. A second source, statistical discrimination, is a way of dealing with a lack of information: employers wrongly perceive that all members of a group have characteristics that make them less productive.

7. What are minimum wages?

A minimum wage is a government-imposed price floor defining the least that someone can be paid.

8. Who bears the negative effects of a minimum wage?

A minimum wage creates unemployment among those who have the least value to a firm, namely teenagers and low-skilled workers. It also adversely affects firms who must now hire fewer workers and pay them more.

9. Are incomes distributed equally in the United States?

No. In a market system, income is derived from the ownership of resources: people with more resources, or with more highly valued resources, receive higher incomes. Doctors are more highly paid than ditch diggers; people who have accumulated lots of capital receive more interest than people without any savings. In the United States, the top 20 percent of the population earns over 44 percent of the total national income, and the bottom 20 percent of the population earns less than 5 percent of the national income.

A Lorenz curve shows the degree to which income is distributed equally (or unequally) within a society. If all incomes are the same, the Lorenz curve is a straight line; the more unequally distributed incomes are, the more bowed the Lorenz curve becomes. Lorenz curves provide an easy way to compare income distributions across countries or within the same country at different times.

10. How is poverty measured, and does poverty exist in the United States?

Poverty can be measured in two ways. Lorenz curves look at poverty in relative terms: What share of the national income do the poorest people get? Poverty also can be looked at in absolute terms: What per capita income is necessary to meet basic human needs? The official U.S. poverty statistics gathered by the federal government use an absolute standard to set the minimum income level ($16,036) that avoids poverty, based on the cost of a nutritionally adequate diet. Using this standard, over 14 percent of the U.S. population-over 36 million people-live in poverty.

11. Who are the poor?

The incidence of poverty is distributed unevenly across groups within the United States. Age is one factor here. Younger and older people make up most of the poverty group. The percentage of families headed by a female that are below the poverty line is much higher than that of families headed by a male; black and Hispanic families have larger percentages below the poverty line than do white families.