Reference no: EM13157460

Question 1: The economic implications of externalities (5 marks to parts a and b)

a) Briefly explain what an externality is in economic terms using an example to illustrate your answer.

b) Draw a diagram showing how the market equilibrium will change if the marginal social costs of a polluting production activity are included rather than just the marginal private costs of that activity.

Question 2: Public goods

(a) Define and describe the two main characteristics that define a public good.

(b) Using these characteristics construct a matrix of four types of good (from pure private goods to pure public goods) and list three examples of such goods under each type.