--%>
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 : Utilitarianism-Peoples happiness The

    The social goal of providing the biggest happiness to the most people is intent to practice the: (i) Precautionary discretion. (ii) Classical theory. (iii) Utilitarianism. (iv) Speculative balances. (v) Arbitrage. Can someone pleas

    		•
  • Q : Categorize and quantify poverty Most

    Most historical studies intended to categorize and quantify poverty within the United States: (w) consider both assets as well as money income. (x) conclude which almost one-half of all families are below the poverty level. (y) suggest that from the 1

    		•
  • Q : Market Power-Monopsony Power- Output

    Assume that a firm with market power in the output market wants to develop and that hiring more workers needs it to raise salaries 8 percent for all the workers. Output prices will most likely: (w) Increase 8 percent to cover the wage rise. (x) Increase less than 8 pe

    		•
  • Q : Purely competitive decreasing cost

    When a decreasing cost industry is purely competitive in that case: (1) each firm’s long-run supply curve is downward sloping. (2) each firm encounters increasing returns to scale. (3) growth of industry output yields lower per unit costs. (4) c

    		•
  • Q : Determine income elasticity of demand

    This given figure as in below demonstrates how the consumption of goods A, B, C and D differs as a family’s income changes. There income elasticity of demand equivalents 1 for: (w) good A. (x) good B  (y) good C. (z) good D

    		•
  • Q : Tax onto the mathematically impaired By

    By the opinion of public finance economists and financial analysts that the label “a tax onto the mathematically impaired” is most likely most applicable to: (1) land taxes. (2) income taxes. (3) inheritance taxes. (4) purchases of lottery

    		•
  • Q : Determine price elasticity of demand An

    An approximate estimate of the price elasticity of demand is best computed by the absolute value of the formula: (1) change in P / change within Q. (2) % change in Q / % change in P. (3) % change in Q / % change in income. (4) % chang

    		•
  • Q : Differences in the arc elasticities of

    The dissimilarities in the arc elasticities of demands for labor among the Ajax Corporation and Bosun Limited are consistent along with an inference which Bosun: (1) is a more profitable firm than Ajax. (2) hires more highly skilled workers than Ajax

    		•
  • Q : Competitive theory of prices Normal 0

    Normal 0 false false

  • Q : Diminishing marginal utility and

    The three reasons for downward slope of a demand curve are: (1) Diminishing marginal utility, income effect and the substitution effect. (2) Scarcity, tastes & preferences, and purchasing power. (3) Opportunity costs, rational decision making and

    		•