Business Economics

Running head: BUSINESS ECONOMICS
Business Economics
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1BUSINESS ECONOMICS
Table of Contents
Part A: Externality...........................................................................................................................2
Question 1.1.................................................................................................................................2
Question 2.2.................................................................................................................................2
Question 1.3.................................................................................................................................4
Part 2: Inflation................................................................................................................................6
Question 2.2.................................................................................................................................6
Question 2.2.................................................................................................................................7
Question 2.3...............................................................................................................................10
Part 3: Minimum wage..................................................................................................................11
Question 3.1...............................................................................................................................11
Question 3.2...............................................................................................................................12
Question 3.3...............................................................................................................................15
References......................................................................................................................................17

2BUSINESS ECONOMICS
Part A: Externality
Question 1.1
Negative externalities occur when a production and consumption activity imposes an
external cost on the third party and is not accounted by either party of transaction (Kreps 2019).
In case of Melbourne airport, the negative externality is associated with the discourage of
harmful chemical named as per and poly fluoroalkyl chemicals (PFAS) in the nearby water in
Maribyrnong River. The chemical if discharged in excessive quantity can lead immune
dysfunction, certain types of cancer or hormonal interference. Until 2010, the PFAS substances
were found in the foams used in the airport for emergency training and for the purpose of
firefighting. Aqueous film forming foams are used in aircraft hangars for the purpose of deluge
system. These substances release from the airport and mix with the water degrading the water
quality (Cuthbertson 2018). Use of the polluted water harms farmers and people of the region
imposing an external cost. Thus Melbourne airport is responsible for creating negative
externalities in the nearby region.
Question 2.2
Negative externality and market failure
Among various reasons responsible for hampering efficient functioning of market,
presence of externality is one primary factor causing a market failure. The main problem with
externality is that direct agents involved in the activity do not account for the external cost or
external benefit (Cowell 2018). As a result, market demand and market supply curve only
represent private marginal cost or private marginal benefit. Socially efficient outcome thus is
different from free market outcome.

3BUSINESS ECONOMICS
In case of negative externalities, the production activity imposes an external cost on the
society. As private party does not consider the external cost, the private marginal cost is lower
than social marginal cost of production. Socially efficient outcome occurs where social marginal
cost matches with marginal social benefit. Because of underestimation of actual cost of
production, free market produces larger than socially optimal quantity resulting in market failure
(Friedman 2017). This is illustrated in figure 1.
Figure 1: Negative externality and market failure
(Source: as created by author)
In the above figure, demand and supply in the private market are shown as the respective
curves named as DD and SS. If negative externality presents in production such as the harmful
consequences of the use of AFFF containing PFAS, the social marginal cost is higher than
private marginal cost of production. The supply curve SS shows private marginal cost. The
marginal social cost (MSC) curve lies above the marginal private cost (MPC). The demand curve