a) (Figure: Possible Long-Run Outcome) In the figure Possible Long-Run Outcome,

Question

a) (Figure: Possible Long-Run Outcome) In the figure Possible Long-Run Outcome, which price and quantity refer to a potential long-run profit maximizing outcome for a firm producing in a monopolistically competitive market?

b) Why does this point represent a long run outcome?

c) What are positive externalities? List some examples of external benefits.

d) What are negative externalities? List some examples of external costs.

e) How much pollution will producers generate if there are no government regulations?

f) Define both marginal social benefit and marginal social cost and give at least 2 examples of both.

Explanation / Answer

(a) Such price/quantity combination is (P1, Q1).

(b) A monopolistic competitive firm earns zero economic profit in the long run, therefore for the firm, Price = ATC where demand curve intersects ATC curve. This occurs at the combnation (P1, Q1).

(c) Positive externalities are outcomes of actions taken by an entity whose benefits are utilized by other entities who do not pay for using the outcome.

For example, a private firm which repairs the local road to transport its own raw materials inside its factory, is paying for the road repair cost. But local residents use the same road free of cost and so, this is a positive externality.

(d) Negative externalities are outcomes of actions taken by an entity whose harmful effects are imposed on other entities who are not compensated for suffering from the adverse effect. Pollution generated by local factory and residents suffering from it is example of a negative externality.

NOTE: First 4 sub-questions are answered.

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