Micro Economics

When external costs are present, the market equilibrium use of natural resources is inefficient because the social benefit is less than the social cost. Positive externalities or external benefits impose a positive effect on the third party. Eg: Vaccinations provide a direct benefit to the patient and a spillover effect to the other people. MMR vaccination is given to patients to prevent them from contracting the disease Source: Business Economics Slides The demand curve (D1) depicts the price patients are willing to spend on the MMR vaccination to receive the benefit of a reduced probability of infection.

Supply curve S reflects the quantities of shots suppliers offer for sale at different price levels. An equilibrium point E1 the market fails to achieve an efficient allocation of resources. MMR vaccination has a spillover effect which will benefit society by reducing the likelihood of spreading the diseases. D2 reflects the new demand curve which includes the external benefit to non-consumers with efficient equilibrium E2. At this point suppliers devote greater resources to the immunization avoiding under allocation of resources.

Negative externalities or external cost impose a negative effect on the third party. Eg: Offshore drilling in the Gulf of Mexico resulted in severe negative externalities such pollution. Source: Business Economics slides The demand curve D1and supply curve S1 reflect the market equilibrium which is inefficient since it fails to acknowledge the negative externalities produced. The absence of the cost of oil spills in the price of offshore oil means that firms produce more output than socially desirable.

Includes the cost of oil spills the equilibrium price rises to P2 and the quantity becomes Q2. E2 reflects the full cost including the environmental cost associated with the activity. (b) Why does a good or service become a public good or service? (2. 5 marks) A product or service that an individual can consume without reducing its availability to another individual which can be collectively consumed from which no one is excluded. National security, sewer systems and public parks are all examples of public goods.

Explain why each of the following examples are either public goods or services, or private goods or services? (? mark each correct classification and ? marks for each reason). Item Public/ Private Explanation A privately owned enginerring and material research laboratory undertaking contractual research on weapons development; Private The nature of the organisation being a private entitty which charges a fee for its services and the fact that two critierias of non excludability and non-rivalrous are not satisfied. The quaranteen service; Public

Pure public service since it can be collectively consumed and its non excludability making it avaible to every citizen. A toll road originally financed through government debt Semi Public Fee is charged for usage therfore does not satidfy the non excludability criteria, however was financed through the government. Courses offerred by a fee charging privately owned teaching institution that receives some government funding Semi Public Price charged indicates its not acessable to everyone however recives government funding offering a reduced rate to the students.