Topic 2:

Question 1

Externalities.

Answer 1

The positive or negative side effects of an economic activity that affects people who are not involved in the process.

Question 2

Third parties.

Answer 2

Individuals who are not involved in the economical activity but still are affected by it. In terms of externalities they are important because they experience the unintended consequences of these actions whether positive or not.

Question 3

Terms of trade.

Answer 3

The ratio at which a country can trade its exports more than its imports.

Question 4

What are the main reasons of introducing a subsidy.

Answer 4

Lowering the production cost, encouraging supply, making goods affordable, promoting positive subsidies, supporting economic growth, and protecting key industries.

Question 5

What is the main intention of Pigouvian Taxes.

Answer 5

It is to discourage from activities that promote negative externalities by increasing their costs, aligning private cost with social cost and promoting efficient resource allocation.

Question 6

What are three possible outcomes of introducing Pigouvian tax?

Answer 6

1) Reduction of externality 2) Internalization of costs 3) Efficient resource allocation.