Micro Economics

Topics: Supply and demand, Externality, Market failure Pages: 3 (664 words) Published: April 4, 2014

Subject:Business Economics

Subject Code:BUECO5903

Course Coordinator / Moderator:Paul McPhee / David Spiers

Assignment A:Microeconomics

Student Name: Noor Aini Faiz

Student Number: 30120381

Lecturer: Dr. Ganeshamoorthy

Question 1:

(a) Explain and illustrate using suitable diagrams, the impact of external costs and external benefits on resource allocation; (2.5 marks)

An externality is a cost or benefit imposed on people other than the consumer or producer of a good. 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...
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