Microeconomics Externalities, Market Power Assignment

Introductory* Micro*economics 316-102 *Sem 1*,2010 Assignment 2: Genevieve Blanch QUESTION 1. Externalities in this situation exist where the Government, Country or Private Organisation decides to launch a new satellite causing costs and benefits to other members of society which do not impact on the G,C or PO. Such externalities include: NEGATIVE (Costs to other members of society) Hazard to the useful working satellites that surround Earth. Threat to our dependence for communications, broadcasting and surveillance. Debris from one collision causing a second, which creates still more debris and collisions. A socially optimal outcomes occurs when then the social maximal benefit equals social marginal cost meaning the surplus to society is maximized. At the same time efficient market equilibrium is needed where the private marginal benefit (PMB) equals Private marginal cost (PMC). {draw:line} {draw:line} {draw:line} SMC=PMC {draw:line} {draw:line} SMB=PMB Q* For each active satellite a certain amount of debris is released into space. Because the debris is a hazard to other working satellites it is considered a negative externality. Due to this negative externality in production, the social cost (SMC) of producing active satellites exceeds the private cost (PMC). This means the socially desirable number of active satellites, Q optimum, is smaller than the equilibrium quantity Q* (As seen below). Graph: Debris and the social optimum {draw:line} * {draw:line} * SMC {draw:line} {draw:line} * *Price of satellites. {draw:line} (Demand) PMC * {draw:line} {draw:line} * Optimum {draw:line} (Supply) PMB=SMB {draw:line} Q optimum* *Q * * *Q=No. of satellites launched We could conclude from the article that the socially optimal outcome is not being achieved due to the negative externalities. b) The article suggests as solution*s* to achieve socially

References: http://www.colleges.unimelb.edu.au/assets/uploads/Comparative-Costs-2010.pdf University of Melbourne, ICC (2010)._Comparative Costs._ http://accom.anu.edu.au/UAS/2340/version/1/part/4/data/ANU%20Hall%20and%20College%20Fee%20Summary%202010%20v5.pdf?branch=main&language=default Australian National University, 2010. ANU Hall and fee summary.