For question (2), answer two of the options below: a) Define externality, and br
ID: 2738715 • Letter: F
Question
For question (2), answer two of the options below:
a) Define externality, and briefly discuss examples of a positive and negative externality.
b) Briefly compare command-and control environmental regulation to a pollution charge. Does a pollution charge have any advantages over command-and-control? Elucidate.
c) Education provides both private benefits to those who receive it and broader social benefits for the economy as a whole. Government policies address the issue of positive spillovers in technology. Suggest a parallel set of policies that governments could follow for addressing positive externalities in education.
d) Radio stations, tornado sirens, light houses, and street lights are all public goods in that all are nonrival and Therefore, why does the government provide tornado sirens, street lights and light houses, but not radio stations (other than PBS stations)?
3. HighFlyer Airlines wants to build new airplanes with greatly increased cabin space. This will allow HighFlyer Airlines to give passengers more comfort and sell more tickets at a higher price. However, redesigning the cabin means rethinking many other elements of the airplane as well, like the placement of engines and luggage, and the most efficient shape of the plane for moving through the air. HighFlyer Airlines has developed a list of possible methods to increase cabin space, along with estimates of how these approaches would affect costs of operating the plane and sales of airline tickets. Based on these estimates, the following table shows the value of R&D projects that provide at least a certain private rate of return.
Private Rate of Return
(%)
Value of R&D
(millions of $)
12
100
10
200
8
300
6
400
4
500
*If the opportunity cost of financial capital for HighFlyer Airlines is 6%, how much should the firm invest in R&D?
*Assume that the social rate of return for R&D is an additional 2% on top of the private return; that is, an R&D investment that had a 7% private return to HighFlyer Airlines would have a 9% social return. How much investment is socially optimal at the 6% interest rate?
Column 1 = Private Rate of Return.
Column 2 = Value of R&D Projects that Return at Least the Private Rate of Return to HighFlyer Airlines.
Private Rate of Return
(%)
Value of R&D
(millions of $)
12
100
10
200
8
300
6
400
4
500
Explanation / Answer
2. a) Externalities are a loss or gain in the welfare of one party resulting from an activity of another party, without there being any compensation for the losing party. Externalities are an important consideration in cost-benefit analysis. An externality is a consequence of an economic activity experienced by unrelated third parties; it can be either positive or negative.
Pollution emitted by a factory that spoils the surrounding environment and affects the health of nearby residents is an example of a negative externality. The effect of a well-educated labor force on the productivity of a company is an example of a positive externality.
c) One role for government is to implement economic policies that promote positive externalities. There are two general approaches to promoting positive externalities; to increase the supply of, and demand for, goods, services and resources that generate external benefits.
A stable and democratic society is impossible without a minimum degree of literacy and knowledge on the part of most citizens and without widespread acceptance of some common set of values. Education can contribute to both. In consequence, the gain from the education of a child accrues not only to the child but also to other members of the society.
Positive Externality from Education:
a) Individuals that are more educated are usually more productive workers.
b) Educated citizens are more informed and usually more active voters.
c) Families have access to financial assistance through education grants and loans.
d) Pubic education helps with redistribution. All families, no matter their income level, can provide education to their children.
e) Having public schools that provide mandatory education gives every child the chance to learn and become to leaders of our future, a huge positive externality for society.
3) Investment in R&D = $400 Millions
Investment is socially optimal at the 6% interest rate = 6% + 2 % = 8%
= $300 millions
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.