Question

Unit 8 Market Failures: Externalities, public goods, natural resources The production of coffee pods results in environmental damages when consumers throw the pods away. Currently consumers are not responsible for the costs of disposing of these coffee pods. The environmental damages caused by throwing away the coffee pods is an example of a: a Positive externality (6. Negative externality c. Private cost d. Private benefit Consider the market for coffee in the graph to the right. 1. Left unregulated, what is the equilibrium price and quantity? What is the efficient quantity? Wo regulation PA $5 Q = 5 2. Is the efficient price higher or lower than the equilibrium price? The quantity in your groups discuss why. with regulation, equilibrium occurs at the point of intersection Pale Q=4 3. Suppose that the government imposed a $2 tax on the producers of coffee pods. Show the impact of the tax on the diagram. 4. Explain why tax makes the market MORE efficient? 5. Explain how the above analysis would differ if the market had a positive externality, and how the efficiency of such a market could be improved.

Answer 1

(uuton 6:-> CAS, + Tax msc lay 0 3 5 When of coffee to the gout imposed a $2 tax on the producer pods, the supply cure will shift uporlds left. New price = $7 Quantity = 3. Question 4:→ Tax makes the market kes the market MORE efficient because f a good is producing a negative externality Gout can impose' trax. which will usult it deiving the prices high or up and it will dis courage the consumers to consume more of that good: And the revenue collected through the tax can be helpful in carrying carrying out many activities in economy. Ics Scanned with CamScanner

s Cheeslim 5;- msc M Price omsB) D(mclginal pirate benefit) Q, Q2-04 Suba At point E msc MSB and at point E,=> MSC = msß. This shift in demand curve happens when gout stepts in with the subsidy. At aty Q -> benefit to society is greater than the cost og to the Society omse> msc) When Gout introduced a subsidy It will shyt the demand curre to right. And at de maß = msa, cs Scanned with CamScanner

Question 6 - Private Goocks :- Rivalsous Excll doble Example ;- food, clothes and flowers ere.... (7720 majority on goods destined and services consumed 'ină market economy we private goods). In psivate goods Market the maçket failure can Occcis due to -> (1) Externalities CPositive or negative) (2) Asymmetric information (3) monopoly power (Imperfect markets) → Externalities can be eliminceted by social contool meelsures and the use of taxes and Subsidies. 1 → To contool the Monopoly powes gout can impose taxes. by price legulation cảnd' taxation. By anti- monopoly Keuis' and destrictive teeole poactiels logislation o (2) Public Goods :- Non-Rival ļous Non - Exclu double Excemple :- stotenge , Narimal clefense, know ledge, Lighthouse, street lights, Kalo and oreles ere. Public Goods cend market feuilere ; - Public Goods vre an example og Maket faillire - --> They aren't provided normally by private sectos -> The Idecision o output is madó sự gout → free rider probleń cusociated with it. -> missing markets Solution - As these goods atc non excludable and non-skivalrou. di Drivelafirisha don't provide thom, creating Markot failure. So cup maransion in to provide public goodly, CY

Private Moukets with negative externality cu inefficient because (1) the price is too low and aty is → A market with positive externality can be made moje. Officient with a (b) Subsidy - Public Goods are (6) Non excludable and non- Rival. cs Scanned with CamScanner