Problem

Why might private markets tend to provide too few…

01:01

Problem 10 Medium Difficulty

Will the demand for borrowing and investing in R&D be higher or lower if there are no external benefits?

Answer

Externality is impact on the third-party who is not related to the transaction but is effect by that
transaction happening between two parties. A positive externality spreads the benefit to others as
well like innovation, etc. Public goods are those goods which are both non-rival and
nonexcludable.
The demand for borrowing and investing in R\&D by firms changes when there are no external
benefits. When there are external benefits then R\&D increases because there are beneficial
spillover effects to the firm as well which increases their returns so they are ready for more
investment but when there are no external benefit the R\&D borrowing and investment will be as
per private cost only and it will decrease.

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Principles of Microeconomics for AP® Courses

Chapter 13

Positive Externalities and Public Goods

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Zim A.

November 7, 2021

What can government do to encourage the development of the new technology

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Video Transcript

so imagine this is just our supply and demand graph for the market for borrowing and investing in R and D. And if there are no external benefits than it just looks exactly like this are normal supply curve are normal demand curve Onley, illustrating private supply and private demand. But what if there are spillover benefits positive externalities that is represented like this by an increase in demand? And while you can see that the price will go up, the other important thing to notice is that the quantity is also going to increase. So back to the original question. Will the demand for barring and investing be higher or lower? Well, if there's external benefits, it will certainly be higher. But if there are no external benefits than what happens, well, we get precisely the opposite movement. We moved from the larger demand curve to the smaller demand curve, and therefore there's going to be a decreased quantity

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