Microeconomics Externalities, Market Power Assignment

Introductory* Micro*economics 316-102 *Sem 1*,2010 Assignment 2: Genevieve Blanch QUESTION 1. Externalities in this situation exist where the Government, Country or Private Organisation decides to launch a new satellite causing costs and benefits to other members of society which do not impact on the G,C or PO. Such externalities include: NEGATIVE (Costs to other members of society) Hazard to the useful working satellites that surround Earth. Threat to our dependence for communications, broadcasting and surveillance. Debris from one collision causing a second, which creates still more debris and collisions. A socially optimal outcomes occurs when then the social maximal benefit†¦show more content†¦The free rider problem comes from the fact that a public good is â€Å"non-excludable†. It’s when decision makers own well being can be improved by making others pay for the good. Satellite launches are public goods because they are neither excludable nor rivalr ous in consumption. People cannot be prevented from using a satellite launcher and one persons use does not reduce another persons use of it. Solutions: Government supplies satellite launches. The government takes over as supplier of satellite launches. They must calculate the SMB and SMC deciding on an efficient quantity, keeping in mind the willingness to pay of satellite launch consumers. Then, using the Lindahl tax the government could finance provision of the satellite launchers by asking consumers with higher revenue to pay more. This means that consumers share of the Social marginal benefit is multiplied by the cost of the launcher. (SMB x Cost=Lindahl tax). The government provides increased incentive to supply clean satellite launchers by assigning property rights. Involves assigning ownership of launchers to certain suppliers who can charge other consumers for using the launchers. QUESTION 2: Relative importance of fixed costs and variable costs in the retail grocery industry? 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