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Chapter 13: Q.1 (page 315)

Do market demand curves reflect positive externalities? Why or why not?

Short Answer

Expert verified

No, the market demand curve reflect only the private benefits received by the consumer.

Step by step solution

01

Content Introduction

Positive externalities benefit a third party or parties that did not purchase the product or service that generated the externalities.

02

Content Explanation

A market demand curve, on the other hand, does not show positive externalities because it solely reflects the private advantages obtained by the product's consumers. Positive externalities generate societal benefits, which a market demand curve captures.

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Most popular questions from this chapter

Suppose that Sony's R&D investment in digital devices has increased profits by 20%. Is this a private or social benefit?

Assume that the marginal private costs of a firm producing fuel-efficient cars is greater than the marginal social costs. Assume that the marginal private benefits of a firm producing fuel-efficient cars is the same as the marginal social benefits. Discuss one way that the government can try to increase production and sales of fuel efficient cars to the socially desirable amount. Hint: the government is trying to affect production through costs, not benefits.

What can government do to encourage the development of new technology?

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 engine and luggage placement, 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 the plane's operating costs and ticket sales. Based on these estimates, Table 13.5 shows the value of R&D projects that provide at least a certain private rate of return. 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. Use the data to answer the following questions.

Private rate of returnValue of R&D
12%\(100
10%\)200
8%\(300
6%\)400
4%$500

a. If the opportunity cost of financial capital for HighFlyer Airlines is 6%, how much should the firm invest in R&D?

b. 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?

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