To ensure all students are protected from getting the flu this year, your school offers free flu shots. What type of externality exists in this example? A. Neutral externality. B. Positive production externality. C. Negative production externality. D. Positive consumption externality. E. Negative consumption externality.
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Neutral externality: This is when a third party is not affected by the production or consumption of a good or service. B. Positive production externality: This occurs when the production of a good or service benefits a third party not directly involved in the Show more…
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Match each of the following characteristics or scenarios with either the term negative externality or the term positive externality. a. Overallocation of resources. b. Tammy installs a very nice front garden, raising the property values of all the other houses on her block. c. Market demand curves are too far to the left (too low). d. Underallocation of resources. e. Water pollution from a factory forces neighbors to buy water purifiers.
Comprehension: Assume that there are 2 firms producing steel. There is a negative externality due to production causing pollution. Firm 1's output is q1 and firm 2's is q2. Assume that the market price for steel is Ps=1. Now consider two scenarios : Scenario 1 : Assume that firm 1's cost function is C1(q1) = q1^2 and firm 2's cost function is C2 (q2, q1) = (q2 + 0.75 q1)^2. In short, firm 1's production is not affected by firm 2 but firm 2's production is affected by firm 1, i.e., Firms 1's operation causes firm 2's costs to rise. Scenario 2 : Assume that negative externality works both ways i.e. both the firms face the adverse impact. So assume C1(q1, q2) = (q1 + 0.75 q2)^2 and C2(q1, q2) = (q2 + 0.75 q1)^2, i.e., Firms 1's operation causes firm 2's costs to rise and vice versa. Q.141 What is the equilibrium profit of firm 2 (̃̀2) in the short run, in Scenario 1 ? (1) ̃̀2 = 0.025 (2) ̃̀2 = 0.125 (3) ̃̀2 = -0.125 (4) ̃̀2 = 0.75
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