B.E_T3_Q3 - the private value of the good(under consumption...

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ABBE 33033 BUSINESS ECONOMICS Tutorial 3 Question 3 ( April 2013/2014) (a) According to doctors, exercise not only makes us feel better and looks younger but it also makes us less likely to fall sick. Based on the statement above: (i) Identify the type of externality. (2 marks) (ii) Draw a diagram to show the externality described in part (i) above. (4 marks) (iii) Describe how the above externality leads to inefficiency. (4 marks) (b) (i) Explain Coase theorem with an example. (4 marks) (ii) Describe THREE (3) reasons why Coase theorem may fail. (6 marks) [Total: 20 marks] Answer (a) (i) Positive Consumption Externality. (ii) Price (iii) When intersection of supply curve and social-value curve determines the optimal quantity output level. The optimal output level is more than the market equilibrium quantity. The market produces a smaller quantity than that is socially desirable. The social value of the good exceeds
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Unformatted text preview: the private value of the good.(under consumption, dead weight lost) (b) (i) The Coase Theorem is a position that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own. (ii) Transaction Costs-It is the costs that parties incur in the process of agreeing to and following through on a bargain.-Sometimes the private solution approach fails because transaction costs can be so high that private agreement is not possible.-Example: consultant fees Bargaining simply breaks down -Everyone went to hold for the better deal for themselves which is the most beneficial to them. Large number of interested parties-Too much parties involve in a externality and it is costly if coordinating everyone. Supply (private cost) Social Value Demand (Private value) Quantity Qoptimum Qmarket...
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