d. Give two examples of a spillover cost situation and explain why your examples are correct. e. Explain in detail, the economic effects of spillover costs. Provide details starting with the firm avoiding costs (how and why that happens) and conclude by explaining the nature of the market failure and what it really means.f. Explain in detail, how spillover costs are corrected and how those two approaches would actually work to solve the problem. Be very detailed.

Question
Asked Sep 26, 2019

d. Give two examples of a spillover cost situation and

explain why your examples are correct.

e. Explain in detail, the economic effects of spillover

costs. Provide details starting with the firm avoiding costs (how and why that happens) and conclude by explaining the nature of the market failure and what it really means.

f. Explain in detail, how spillover costs are corrected and how those two approaches would actually work to solve the problem. Be very detailed.

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Expert Answer

Step 1

(d) Spillover effects are defined as the actions of individuals or the effects of the third party over the other parties.  It is the spillover costs caused due to the consumption or trade that spill over onto the other parties. For example, the smoker when smokes, exposes the nonsmokers towards the negative spillover effect. The nonsmoker can face health problem from the second-hand smoke, leading to hazardous long term problem.

Another example is of the pollution. While driving the car, it gives rise to smoke and pollution which harms the health of the bypassers and impacts the environment due to the bad air.

Step 2

(e) Costs from the spillover effects are defined as the costs resulted due to the consumption or trade as a result of other parties. The market failure happens due to the excessive exploitation of the public good problem and due to the uncontrolled problem of externality. Spillover effects are defined as the network effect which is caused due to the &nb...

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