Final answer:
Competition is encouraged by the freedom of sellers and buyers to enter or exit an industry, with barriers to entry either enforced by the government or occurring naturally within the market, impacting the level of competition.
Step-by-step explanation:
The condition that will encourage competition among firms is C. The freedom of sellers and buyers to enter or exit an industry. When there are few restrictions on entry or exit, it encourages new participants to join the market if they believe they can provide value or find a niche, thus driving competition.
To classify various situations related to competitive markets and barriers to entry:
- a. A city passes a law on how many licenses it will issue for taxicabs: government-enforced barrier to entry.
- b. A city passes a law that all taxicab drivers must pass a driving safety test and have insurance: government-enforced barrier to entry.
- c. A well-known trademark: barrier to entry that is not government-enforced.
- d. Owning a spring that offers very pure water: barrier to entry that is not government-enforced.
- e. An industry where economies of scale are very large compared to the size of demand in the market: barrier to entry that is not government-enforced.
Barriers to entry can be legal, technological, or market-based, and can greatly influence the level of competition in a market. Examples of government-enforced barriers include licensing requirements, safety regulations, and control of natural resources. Brand recognition and economies of scale, on the other hand, are natural barriers created by the market which can deter new competition.