To ascertain:Difference between the two situation and reason for inefficient allocation of resources in second situation but not in first.
Answer to Problem 1RQ
First situation is not externality as property rights are undefined while second situation is externality.
Explanation of Solution
Externality arises when benefits or negative impact of a person is borne or enjoyed by other person without any aid or compensation. This usually occurs because property rights are not defined properly. One of the ways to assign property rights is bidding. It is a process in which the person who gives the maximum value to a commodity gets the right of the commodity. The bid gets higher and higher due to competition not because on any negative damage done to environment.
On the other hand, in the case of pollution, the
Introduction:
Externality is a situation in which one’s activity directly or indirectly affects other party. There are two types of externality: Positive and negative externality. Positive externality is a situation in which action of one’s party gives benefit to other parties without asking for any rebate. Negative externality is a situation in which actions of one party harms other parties.
Want to see more full solutions like this?
Chapter 16 Solutions
EBK INTERMEDIATE MICROECONOMICS AND ITS
- Draw a standard supply and demand diagram for televisions, and indicate the equilibrium price and output. a. Assuming that the production of televisions generates external costs, illustrate the effect of the producers being forced to pay a tax equal to the external costs generated, and indicate the equilibrium output. b. If instead of generating external costs, television production generates external benefits, illustrate the effect of the producers being given a subsidy equal to the external benefits generated, and indicate the equilibrium output.arrow_forwardExplain the concept of an externality. Explain and show graphically how externalities lead to market failure and an inefficient allocation of resources.arrow_forwardExplain the "Externalities theory" in general Explain the concept of "social marginal cost" Give one clear example of production externality and its influence on the "social marginal cost".arrow_forward
- Give an example of a negative externality and anexample of a positive externalityarrow_forwarda. According to Economist Vilfredo Pareto, a condition of ‘Pareto Optimality’, which refers to efficient allocation of natural resources such that no reallocation of resources of such could benefit any person without lowering the net benefits for at least one other person, cannot be attained in the presence of Externalities. Explain how externalities affect the condition of Pareto Optimality using suitable examples of each type of the externalities.arrow_forwardIf a competitive market is characterized by a negative externality, then which of the following statements is true Question 5Answer a. Social surplus is less than market surplus b. Social surplus is equal to market surplus c. Social surplus may be greater than or less than market surplus, depending on the size of the externality d. Social surplus is greater than market surplusarrow_forward
- Answer the following for the given example (for a perfectly competitive market): Your neighbours holding a physical gathering during the pandemic (a) Does an externality exist? If so, is it positive/negative (or both) (b) Use Coase’s framework to identify the cause of the externality (c) If an externality exists, determine whether the Coase theorem applies (i.e. is it possible/feasible to assign property rights and solve the problem?). Provide reasoning. (d) If an externality exists and the Coase theorem does not apply, discuss a government/institutional solution that can mitigate the problem of externality. Provide reasoning.arrow_forwardPlease no written by hand solution In this question, the letter “A” denotes the last 4 digits of your student number (for example, if your student number is: 183405022, then A = 5022). The perfectly competitive market for coal in a particular region of Turkey is characterized by the following demand and supply curves: QD = 15000 − 300P and QS = −A + 200P. Moreover, the marginal external cost associated with the production of coal is given by the curve: MEC = Q/800. a) Compute the market equilibrium price and output for coal.b) Compute the socially efficient price and output for coal. (Hint: What is MPB, MPC, MSB and MSC?) c) Explain why the answers you calculated in parts (a) and (b) differ.d) Suppose that the government wants to implement a per-unit tax on coal production so that the socially efficient level of production is reached in the market. Write the MPC of the firm with including tax. What is the level of tax that leads to socially efficient output?arrow_forward
- Essentials of Economics (MindTap Course List)EconomicsISBN:9781337091992Author:N. Gregory MankiwPublisher:Cengage LearningEconomics: Private and Public Choice (MindTap Cou...EconomicsISBN:9781305506725Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. MacphersonPublisher:Cengage LearningMicroeconomics: Private and Public Choice (MindTa...EconomicsISBN:9781305506893Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. MacphersonPublisher:Cengage Learning
- Macroeconomics: Private and Public Choice (MindTa...EconomicsISBN:9781305506756Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. MacphersonPublisher:Cengage LearningExploring EconomicsEconomicsISBN:9781544336329Author:Robert L. SextonPublisher:SAGE Publications, IncPrinciples of Economics, 7th Edition (MindTap Cou...EconomicsISBN:9781285165875Author:N. Gregory MankiwPublisher:Cengage Learning