Explain the concept of a market externality. Cite two examples of market externalities and how they create societal costs that are not necessarily captured in their respective transaction costs. A rapidly-growing fast-casual restaurant serving a regional market in the Ohio and Indiana markets was concerned about meeting demand for its burritos and burrito bowls during peak lunch hours. Therefore, the firm added a series of workers in a pilot test in their busiest shop in western Ohio. The shop added more and more workers trying to find their most efficient production point given additional workers. The following table depicts their production capabilities between their critical hours of 11:00 a.m. and 2:00 p.m. Note there have been no changes to the equipment or to the physical plant of the shop; only the number workers has changed.Graph the performance of the workers using Excel; connect the points on the graph with a line or curve.
- What principle of economics has the firm encountered in its pilot test of adding workers attempting to meet peak lunch demand?
- Will this principle have any effect on the costs of the firm at some point? Please explain the relationship between costs and production changes displayed in the graph.