1. Give an example of a positive externality and an example of a negative externality (different from the ones we have seen in class or in the textbook). Postivie: Improving driving habits will decrease the risk of accident for everyone on the road as well as eventually reduce insurance premiums of the driver. Negative: A loud party next door can cause those not involved in the festivities to lose sleep. 2. There are at least three negative externalities associated with driving, as explained in a Case Study from chapter 10 in the textbook. a) Which are these externalities? Does this explain why petrol is taxed so heavily? 1. Congestion: too many cars on the road cause traffic. By taxing petrol, less people drive and use other types of transport, so the traffic decreases. 2. Accidents: people driving large cars such as 4x4 put the rest of the people driving typlical cars in risk because in an accident, people driving typical cars can die due to the size and power of the large car. The petrol tax is and indirect way of making people pay when they large, petrol-thirsty vehicles impose risk on others. 3. Pollution: carbon emission increases by fuel burning so a tax on petrol reduce the quantity consumed of it, that is, less emission of toxic gas. b) Illustrate the market for petrol, labelling the demand curve, the social value curve, the supply curve, the social cost curve, the market equilibrium level of output and the efficient level of outpu
t. c) On your graph, shade the area corresponding to the deadweight loss of the market equilibrium and explain the intuition behind it. Since marginal benefit is not equal to marginal lost, a deadweight welfare loss results. 3. Consider the market for fire extinguishers. a) Why might fire extinguishers exhibit positive externalities? Because fire can spread from the origin place to another, fire extinguishers exhibit poritive externalities. If there’s fire in someone’s house b) Draw a graph of the market for fire extinguishers, labelling the demand curve, the social value curve, the supply curve and the social cost curve.
The private supply and social costs supply curves are one in the same. This is a Consumption externality, which means that the demand curve will be different. There is a larger "social demand" function. c) Indicate the market equilibrium level of output and the efficient level of output. Give an intuitive explanation for why these quantities differ.
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- Spring '14
- Market failure, The Market, Externality, Creative Chemicals