POSITIVE EXTERNALITIES IN PRODUCTION AND CONSUMPTION

Question 1

A POSITIVE EXTERNALITY in consumption IS A

Answer 1

Benefit to 3rd parties as a result of actions of consumers

Question 2

a 3rd party in positive xdternality of consumption is

Answer 2

econ agent not involved inte h transaction or activity taking place at all but is still afeected by it

Question 3

give 3 examples of positive externalities

Answer 3

health care

education

excersise/health eating

Question 4

explain why health care is a +ve externality

Answer 4

if your vacc against the flu

the 3rd party that benefots are the people in sopciety as gopt less chance of getting the flu

Question 5

explain why excersise/healthy eating is a +ve externaity

Answer 5

through consumers doing this

3rd party that ebenfit is employers as workers have a higher productivity so work more often and produce more meaning more rev for firms

Question 6

in a positive externality of consumption explain msb and mpb and why

Answer 6

msb greater than mpb

due tp external beenfits becoming +ve in the sb equation making sb higher than private pebengits

Question 7

what curve ,oves in +ve externlaity of consumption

Answer 7

d curve

msb=mpb=d

Question 8

draw graph

Answer 8

y axis - price/cost/benefits

x axis - quantity

msb hihger than mpb

q1 and p1 at mpb = s

q* p* at social optimum of msb = msc

shade in welfare loss pointing towards social optimum

Question 9

in +ve externality of consumption where does the freemkt allocatre scarce resources

Answer 9

private optimum

mpb=mpc

Question 10

where does society want aosr in +ve external of consumption

Answer 10

where msb=msc

the social optimum

Question 11

where is the reallocation of scarce resources shown by on the graph = 1 point

and explain it = 2 points

Answer 11

q1-q*

theres an underconsumption and underproduction

therefore there’s a MAOSR and alocative inefficiency meaning theres a welfare loss

Question 12

explain why a wl caused in +ve external of consumption

3 points

mention priv optimum quantity and what this tells us about benefits and costs

Answer 12

@q1 social benefits are higher than sc

so we have more beenfits than losses

therfore by not producing extra units from q1-q* we loose out as a society on potential extra social benefit

Question 13

sum up why weve got a welfare loss and losse out on potential social benefit

Answer 13

units q1-q*

sb>sc

so by not producing up to Q*

we loose out on net social benefit

Question 14

analys +ve external of consumption

consumers ignoring ..

3 partially/semi fat paragraphs

Answer 14

consuemrs are ignoring the full sb of actions and only considering pb due to self interest

therfore mkt allocates resources at priv optimum meanignthers an underconsumptiona n production compared to what we want as society (social optimum)

therfore theres allcoative inefficinec anda welfare loss as too few resources are being allcoated to this mkt than socially desirable

Question 15

what are +ve externalities in production

Answer 15

beenfits to 3rd parties as a result of actions of producers

Question 16

give examples of +ve externality in produjction

Answer 16

high qual in work trainign schems

r&D

Question 17

explain how high qual in work trainign schems are +ve external of production

3 points

Answer 17

through producers carrying out traing

3rd party who beenfit are other firms who poach workers who’ve benefitted from training w/o having to offer traing themselves

therefore theres a lower cop and higher pm as workers produce more - meanin higher om that cna be reinvested into r&d

Question 18

explain how r&D is a +ve externality of consumption

Answer 18

firms engaing in exvellent r&d such as new efficient tech

3rd party who beenefit are otehr firms who are able to copy tech w/o spending big amounnt of £ on r&d themselves

therfore they get lower cop w/o big intiiatral cost

Question 19

explain how msc and mpc are

Answer 19

mpc>msc

because ec becomes negative in equation as 3rd parties are beenfiting so sc are lower in realtion to pc

Question 20

draw +Ve external in production graph

Answer 20

x axis - price/costs/benefits

y axis - quanity

mpc are higher than msc

draw d line

q1 ansd p1 are priv optimum mpb = mpc

q* and p* lower and wider at msb=msc

draw welfare loss triangle pointing towards social optimum

Question 21

where does mkt allcoate scarce reosruces in +ve external of production

Answer 21

priv optimum where mpb=mpc

q1 & p1

Question 22

where does society want resources to be allocated in +ve external of consumption

Answer 22

social optimum where msc=msb

q* and p*

Question 23

what does q1-q* represent and why

Answer 23

underconsumption and underproduction taking place

therfore allocative inefficieny as mkt fails to allcoate resources at social optimum casuing a welfare loss

Question 24

what would happen if the extra units from q1-q* where produced

Answer 24

at q1 sb higher than sc so all extra units to q* shoudl be produced
as we get more beenfits than cost in each ase

so by not producing we miss out on extra welfare

Question 25

analayse +ve external of production graph

indi frims only…

Answer 25

indi firms only consider and care about pc not full social cost so ignore any eb to 3rd party firms due to self interest

so resources are misallocatesd at priv instead of socuial optimum QP*

we have a uc and up taking palce of whatev g/s being created

end result is allcoative inefficncey and a welfare loss