--%>
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 : Maximizes profit at total economic of

    When the wholesale price P = $8 per bushel of peaches, it purely competitive peach orchard maximizes profit via producing ___ bushel of peaches at a total economic of profit or loss of $___. (i) zero; loss; -$4,000. (

    		•
  • Q : Absolute Poverty of Income A family

    A family whose income leaves this hovering at the brink of survival and that gives only a razor’s edge existence is experiencing: (w) relative poverty. (x) economic shock. (y) financial destitution. (z) absolute poverty.

    Q : Ratio to determine income elasticity of

    The income elasticity of demand [at a specified price] is computed by the ratio of the relative: (a) change in quantity demanded over a given proportional change in income. (b) reciprocal of the price elasticity of supply. (c) slope of the demand curv

    		•
  • Q : Negative externalities Give the answer

    Give the answer of following question. Negative externalities arise: A) when firms pay more than the opportunity cost of resources. B) when the demand curve for a product is located too far to the left. C) when firms "use" resources without being compelled to pay for

    		•
  • Q : Competition between the producers in

    Is there competition between the producers in Canada?

    		•
  • Q : Problem on organizing the business The

    The individual who wants to begin up a business, however who not want to risk in losing personal property if the business fails, must organizes the business as: (1) Sole proprietorship. (2) Partnership. (3) Corporation. (4) Unlimited partnership.

    Q : Minimum legal price in intersection of

    When a minimum legal price of a good is set below the intersection of the supply and demand curves there will be: (1) shortages and pressures for decreases in price. (2) pressures for increases in price and the emergence of black mark

    		•
  • Q : Perfectly inelastic supply of labor

    Glynn’s supply of labor is perfectly inelastic at: (1) point a. (2) point b. (3) point c. (4) point d. (5) point e. 2</span></p> </div> <!-- /comment-box --> </li> </td> </tr><tr> <td> <li> <div class=

    Q : Minimizes average cost of output When a

    When a monopolist maximizes profit and charges a price equivalent to average cost, in that case the firm: (i) is producing at the minimum point on its marginal cost curve. (ii) also charges a price equal to marginal cost. (iii) is pro

    		•
  • Q : Maximizing profit by hiring labor The

    The firm maximizes profit by hiring the labor at a point where labor’s: (i) Marginal physical product equal its average physical product. (ii) Marginal revenue product equivalents its marginal resource cost. (iii) Rate of exploitation is maximum. (iv) Wage rate

    		•