Economics Exam Conspectus

(i) Explain why market fails in the case of negative externality that arises from, for example, smoking

(ii) Explain how indirect taxes work to address market failure in negative ext

(i) Briefly explain why market fails in the case of positive externality that arises from, for example, healthcare

(ii) Briefly explain how subsidies work to address market failure in positive externalities

(iii) Explain how Es limits effectiveness of subsidies to increase output levels

Limitations of the use of Ep/Es  inaccurate or outdated values

Thesis: Differences in entry fees to the opera, national museums and art galleries between countries is due to perceived differences in the external benefit they generate in each country

Antithesis: differences in entry fees to the opera, national museums and art galleries between countries is due to other reasons

Explain how the size of a firm affects its pricing behaviour and profits earned. [12]

(a)Market structure with no barriers to entry – Perfect Competition

Consider Monopoly

Benefits of the merger between DirecTV & AT&T to consumers and society

Define negative externality:

Negative externality is the cost of consumption or production which falls on people other than the consumers or producers of the product, for which no compensation is made.

Justification:

Smoking generates harmful effects on non-smokers such as family members & colleagues. They may experience respiratory difficulty as a result of passive smoking leading to smoking-related illnesses and medical cost. These 3rd parties suffer although they were not the direct consumers of cigarette.

The existence of negative externality causes marginal social cost (MSC) to be higher than marginal private cost (MPC), since MSC = MPC + Marginal External Cost (MEC).