Posted: February 10th, 2022


1. Externalities are market imperfections. A free market cannot resolve the adverse outcome of externalities, thus requires intervention of the government.

a. Provide one example for each of the following cases.

i. Negative production externality

ii. Positive production externality

iii. Negative consumption externality

iv. Positive consumption externality

b. In the following diagram, AB is the demand for a good (or private marginal benefit curve) and CD is the supply curve (or private marginal cost curve).

i. Identify the private market equilibrium (is it 1,2,…8 or 9?)

ii. Identify Social Marginal Cost or Social Marginal Benefit (choose from AD, CD, EF, …. etc) and socially optimum equilibria in each of the cases of 1 (a). (Choose from 1 – 9)

Diagram Description automatically generated

2. The government imposes Pigouvian taxes to resolve adverse impact of externalities by driving the equilibrium from a private equilibrium to a socially optimum equilibrium. Identify the Pigouvian tax in the case of negative consumption externality.

3. List major developments in legal doctrine, business environment and government actions in the each of the following two periods.

a. From civil war to the Great Depression

b. After the Great Depression

4. Consider the Aggregate Demand (AD), Short run Aggregate Supply (SRAS) and Long run Aggregate Supply (LRAS) curves drawn on the panel of Price Level and Output.

a. Illustrate a recession

b. Illustrate a boom

c. Explain ‘Policy Debate’

d. Using separate diagrams show the changes in the economy if the government follows each strand of the policy debate.

e. Which strand do you support?

f. Why?


1. Externalities are market flaws. A free market cannot resolve the negative consequences of externalities, necessitating government action.

a. Give one example for each of the following situations.

i. Negative externality in production

ii. Positive externality in production

iii. Negative externality of consuming

iv. Consumption externality that is positive

b. In the picture below, AB represents the demand for a good (or the private marginal benefit curve), while CD represents the supply curve (or private marginal cost curve).

i. Determine the private market equilibrium (is it 1,2,…8, or 9?)

ii. Determine the Social Marginal Cost or Social Marginal Benefit (from AD, CD, EF,…. etc.) and the socially optimum equilibria in each of the situations of 1. (a). (Select a number between 1 and 9)

Diagram Description was generated automatically.

2. The government imposes taxes.

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