Question

Questions 1. Give two examples of goods that are associated with positive externalities. Do not use the examples given in your textbook. 2. Suppose production of a good results in a negative externality. a. What is the relationship between the social cost of the good and the private cost of the good? b. What is the relationship between the market quantity of the good and the socially efficient quantity? c. What is one way the government can intervene in the market to make it more efficient? 3. Imagine that you are a nonsmoker sharing a room with a smoker. According to the Coase theorem, what determines whether your roommate smokes in the room? Is this outcome efficient? How do you and your roommate reach this solution? 4. Many observers believe that the levels of pollution in our society are too high. a. If society wishes to reduce overall pollution by a certain amount, why is it efficient to have different amounts of reduction at different firms? b. Command-and-control approaches often rely on uniform reductions among firms. Why are these approaches generally unable to target the firms that should undertake bigger reductions? c. Economists argue that appropriate corrective taxes or tradable pollution rights will result in efficient pollution reduction. How do these approaches target the firms that should undertake bigger reductions?

Answer 1

1)

Externalities are side effects of consumption or production which are faced by third parties. The market system does not take into account these external effects.

Following are two examples of positive externalities:

• Education: Education has positive externalities, it does not only affect the educated person, but also other individuals who live around the educated person.
• Corona virus protection: Anyone taking precautionary measure to prevent the spread of Corona virus would benefit the all members of society.

Thus, such consumption should be subsidized by the government.