Name
Draw a diagram and provide explanations (below the diagram) in the following situations:
1) Waste created by car manufactures damage the environment around them. (this is negative
externality of production)
A) Draw a diagram to illustrate this situation using the concept of externalities
B) Show on the diagram the welfare loss
C) Show on the diagram and explain the effects of imposing indirect taxes (remember, indirect
taxes shift MPC / explain the problems with the solution as well).
D) Draw another diagram with negative advertisement as a solution (explain the problems with the
solution as well). Make sure that you do not shift the MSB curve by the amount of the externality
because you will get rid of the welfare loss. Make sure you shift it so that you can show the
change in the area of welfare loss.
Part A, B, and C
Part A, B, and D
2) Schools offer excellent education to their students. When these students start working, they are
smart and become superb employees for companies. (this is a positive externality of consumption)
A) Draw a diagram to illustrate this situation using the concept of externalities
B) Show on the diagram the potential welfare gain
C) Show on the diagram and explain the effects of government subsidies (remember, subsidy shift
the MPC / explain the problems with the solution as well). Make sure that you do not shift the
MSC curve by the amount of the externality because you will get rid of the potential welfare gain.
Make sure you shift it so that you can show the change in the area of potential welfare gain.
Part A, B, and C
3) Factories decide to use clean technology in their production to protect their workers. Due to this, the
environment around the factory also becomes greener. (this is a positive externality of production)
A. Draw a diagram to illustrate this situation using the concept of externalities
B. Show on the diagram the potential welfare gain
C. Show on the diagram and explain the effects of government subsidies (explain the problems
with the solution as well). Make sure that you do not shift the MPC curve by the amount of the
externality because you will get rid of the potential welfare gain. Make sure you shift it so that
you can show the change in the area of potential welfare gain.
Part A, B, and C
4) Many smartphone games are causing players to be distracted while driving and commuting. This
causes many accidents that involve third party people. (this is a negative externality of consumption)
a) Draw a diagram to illustrate this situation using the concept of externalities
b) Show on the diagram the welfare loss
c) Show on the diagram and explain the effects of government imposing indirect taxes (explain the
problems with the solution as well). Make sure that you do not shift the MSC curve by the
amount of the externality because you will get rid of the welfare loss. Make sure you shift it so
that you can show the change in the area of welfare loss.
d) Draw another diagram with the government requiring all game players to register and take a 5
hour course on safe game playing by the government as a solution (remember, this affects the
MPB, not the MSC like indirect tax / explain the problems with the solution as well)
Part A, B, and C
Part A, B, and D