--%>
Assignment Help - homework help

External costs and external benefits

Question:

(a)         Explain the impact of external costs and external benefits on resource allocation;

(b)         Why are public goods not produced in sufficient quantities by private markets?

(c)         Which of the following are examples of public goods (or services)? Delete the incorrect option

Explain your choice.

  (i)       The Judicial system       ..................................................................................................................... Yes/No

  (ii)      Pencils       ........................................................................................................................................... Yes/No

  (iii)     The quarantine service    ................................................................................................................. Yes/No

  (iv)     The Great Wall of China....................................................................................................................... Yes/No

  (v)      Contact lenses       ............................................................................................................................. Yes/No

Summary:

The question is about externalities affecting resource allocation, public goods and their implication on the profit of a firm have been answered.

Answer:

(a)     External costs and benefits, known as externalities; can affect resource allocation in both positive and negative manner. A negative externality can increase the cost of operations, and this is mainly due to the harmful effect of one industry's or economic agent's operation on the other. An example may be the effect of a factory dumping its waste in a river, which adversely affects the operations of fishing industry. On the other hand, a positive externality helps reduce the cost of operation in one sector due to favourable operation in other sector. An example in case is a highly educated person living in a locality and teaching people about good effects of sanitation, which leads to a decline in healthcare costs of the locality.

(b)  The private markets take into account only the direct benefits accruing to the producer in the calculation of profit optimization. However, public goods by their very nature are non-rival and non-excludable. This generates positive externalities and hence creates social benefits which are not taken into account by the private producers. This leads to an under-provision of public goods in the private market.

(c)

  • Yes
  • No
  • Yes
  • Yes
  • No

   Related Questions in Microeconomics

  • Q : Economic profits maximizing When this

    When this monopolistic competitor produces Q units, this is maximizing: (w) sales development and its market share. (x) total revenue. (y) economic profits. (z) total fixed cost and its managers' salaries.

  • Q : Canada’s top three trading partners

    Name the Canada’s top three trading partners?

    		•
  • Q : Transaction costs by pure economic rents

    When transaction costs exist, in that case taxes on what appear to be pure economic rents to: (1) pose especially severe problems for economic efficiency. (2) may be inefficient since taxes reduce incentives to put resources to their

    		•
  • Q : State normal good Normal good : It is a

    Normal good: It is a good for which, other things equivalent, a rise in income leads to a rise in demand.

    		•
  • Q : What will happen when a supply of curve

    When a supply curve is positively sloped, a raise in demand will increase the equilibrium price as well as: (w) raise the quantity supplied. (x) raise supply. (y) decrease the quantity supplied. (z) decrease supply.

    		•
  • Q : Break-even levels of output for a firm

    Break-even levels of output for a firm happen where is: (w) total revenue equals total economic cost. (x) accounting profits are zero. (y) total variable cost equals total fixed costs. (z) competitive firms will shut down within the short run.

  • Q : Problem on Exploitation Exploitation

    Exploitation takes place when firms pay resource owners less than their: (i) Maximum resource cost. (ii) Values of marginal product. (iii) Rates of the economic profit. (iv) Marginal revenue products. Find out the

    		•
  • Q : Monopsony Power-Demand for Labor Can

    Can someone help me in finding out the right answer from the given options. After adjusting for the inflation, Alex Rodriquez’s salary with NY Yankees was very higher in 2006 than Henry Aaron's salary with Atlanta Braves in the year 1970s that implies that: (i)

    		•
  • Q : Requirements for pure competition The

    The needs for pure competition are most intimately met by the market for: (i) domestic (American) steel. (ii) comic books. (iii) sugar-coated cereal within your local grocery store. (iv) stocks and bonds traded on Wall Street after they have been issu

    		•
  • Q : Comparison between supply curves

    Comparing supply curves S2 and S3, supply is: (w) more price elastic along S2 than along S3. (x) more price elastic along S3 than S2. (y) equally elastic along both when they have simil

    		•