--%>
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 : Monopolistic competition firm in

    firm in monopolistic competition maximizes its profit by producing where its price is equal to its marginal cost." Is this statement correct or incorrect? Explain.

    		•
  • Q : Value of the marginal product of labor

    The Profit-maximizing firms which operate in the competitive resource and output markets adjust the labor inputs till the wage rate equivalents the: (i) Average revenue from the output. (ii) Output price equivalents the average variable cost. (iii) Marginal utility of

    		•
  • Q : Define Real Rate of Interest Define

    Define Real Rate of Interest in Economics?

    		•
  • Q : Negatively sloped Demand curve When the

    When the demand curve for wheat is negatively sloped, increases in its supply will: (1) Lower the equilibrium price. (2) Increase the equilibrium price. (3) Reduce the equilibrium quantity. (4) Stimulate technological modification.

    Q : Linear demand curves and elasticity

    When price falls and quantity rises along a negatively-sloped linear demand curve: (1) total revenues fall till elasticity equals zero, then this rises. (2) demand is decreasingly price elastic. (3) there is a contrad

    		•
  • Q : High relative income define by Census

    The Department of the Census defines high relative income as experienced while families: (w) earn more than $60,000 annually per worker in the family. (x) have income which is twice the median incomes of other American families. (y) e

    		•
  • Q : Testing Functional structure models

    Testing Functional structure models: It is often hard to tell whether the functional model structure chosen (which almost always in published work appears to generate consistent and robust results) is the only one tested or not.

    Q : Shortages and surpluses in the market A

    A shortage as in below graph, during this market for papayas would match up to line: (1) ab. (2) cd. (3) ac. (4) bd. (5) ae. 1802_example</span></p> </div> <!-- /comment-box --> </li> </td> </tr><tr> <td> <li> <div class=

    Q : Higher value for the Gini index A

    A higher value for Gini index tends to be related with: (w) decreases in the equality of the distribution of income or wealth. (x) decreases in the population’s total amount of income or wealth  (y) reduced overall curvature of the Lorenz c

    		•
  • Q : Short-run supply curve and marginal

    Short-run supply curve of a purely competitive firm’s is the positively sloped part of the marginal cost curve which is above its: (w) average fixed cost curve. (x) resource demand curve. (y) average variable cost. (z) short-run

    		•