Business Economics: Externalities, Market Structures, Efficiency and Demand

Running Head: BUSINESS ECONOMICS
Business Economics
Name of the Student
Name of the University
Author note
Course ID

1BUSINESS ECONOMICS
Table of Contents
Answer 1..........................................................................................................................................2
Answer a......................................................................................................................................2
Answer b......................................................................................................................................3
Answer c......................................................................................................................................3
Answer 2..........................................................................................................................................5
Answer a......................................................................................................................................5
Answer b......................................................................................................................................5
Answer c......................................................................................................................................5
Answer d......................................................................................................................................5
Answer 3..........................................................................................................................................6
Answer a......................................................................................................................................6
Answer b......................................................................................................................................6
Answer c......................................................................................................................................6
Answer d......................................................................................................................................7
Answer e......................................................................................................................................7
Answer 5..........................................................................................................................................7
Answer a......................................................................................................................................7
Answer b......................................................................................................................................9
Answer c....................................................................................................................................10
Answer d....................................................................................................................................12
Answer 9........................................................................................................................................13
Answer a....................................................................................................................................13
Answer b....................................................................................................................................16
Reference list.................................................................................................................................18

2BUSINESS ECONOMICS
Answer 1
Answer a
The presence of external cost or external benefit in the production or consumption
process prevents the efficient allocation of resources. External cost are the cost associated with
production process but not accounted by those directly engaged in such activity. This type of cost
is termed as negative externality (Baumol and Blinder 2015). Under this, the private marginal
cost is lesser than social marginal cost and therefore, the good is overproduced indicating
resources are over allocated. The figure below describes external cost and the resulted
inefficiency in resource allocation.
Figure 1: Inefficient allocation with external cost
External benefit on the other hand indicates additional benefit that society or third party
enjoys an additional benefit from production or consumption of a particular good or service.

3BUSINESS ECONOMICS
Here, social benefit is greater than private benefit. Private market thus produces lower than
socially efficient quantity.
Figure 2: Inefficient allocation with external benefit
Answer b
Goods or services with some specific characteristics cannot be supplied efficiency by
private market. Two prominent characteristics are non rivalry and non excludability. The feature
of non-rivalry indicates that consumption by one individual does not lower the benefit to another
individual. The characteristic of non-excludability indicates that consumption once the good is
supplied no one could be deceived from enjoying benefit of the good. With this feature efficient
functioning of free market fails (Cowen and Tabarrok 2015). The government then need to
intervene in the marketand provides such goods and services for public benefit.
Answer c