Positive externality of production

Question 1

Merit goods

Answer 1

• socially desirable
• intrinsically good
• encourage consumption
• failure of information to consumer
• do not fully perceive full benefits at time (e.g. Long term benefits of education)
• undervalue product, underconsumption when left to mkt forces alone
• gov involvement in resource allocation e.g. subsidizing education

Question 2

Subsidies

Answer 2

• correct +ve externalities of pdtn
• give subsidy = MEB
• compare MPB=MPC, MSB=MSC
• ss curve (MPC) shift right as ss increases
• px falls, induce consumers to increas econsumption
• qdd rises to Qs (socially opt lvl)
• efficient in society POV

Question 3

Evaluation of subsidy (+ve)

Answer 3

• effective in increasing qty of gd produced and consumed

- lowering px for consumers

Question 4

Evaluation of subsidy (-ve)

Answer 4

• difficult achieving optimum results (MSC=MSB)
• subsidies – tax revenue, many alternate uses, each has opp cost
• not possible for gov to subsidize all gds with +ve pdtn ext, must make a choice on which gd to support and how much
• difficult to measure size of ext benefits
• hard to calculate which gd/svc should be supported and lvl of support to receive
• highly political, gov might succumb to political pressure – make choices via political criteria instead of economic (which gives the most benefit)
• real world: unlikely able to shift MPC curve by correct amt to correct +ve ext, hope that is raise consumption close to Qs

Question 5

Gov provision evaluation (-ve)

Answer 5

• opp cost (tax revenue)

- difficult to measure size of ext benefits

Question 6

Legislation and regulation evaluation

Answer 6

• difficult to calculate size of ext benefits
• difficult to determine level of support gds should receive
• e.g 6 years compulsory education might not be socially opt lvl
• can only help to shift MPB curve in the right direction
• raise px, unaffordable to some consumer groups
• legislation and regulation implement tgt w direct provision and subsidies – more effective e.g education (compulsory schooling and direct gov provision)

Question 7

Nudges

Answer 7

• similar effect to legislation and education
• shift MPB rightwards to MSB
• e.g. creating bicycle lanes to encourage use of bike riding, fewer lifts in building
• difficult to design effective nudges, not enough known abt how consumers respond to particular nudges/choice infrastructure
• may not have same effect across income and cultural grps e.g. healthcare, low-income grps cannot afford