Micro Economics
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
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