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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

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?

Are the following goods non-rival in consumption?

a. slice of pizza

b. laptop computer

c. public radio

d. ice cream cone

Which of the following goods or services are nonexcludable?

a. police protection

b. streaming music from satellite transmission programs

c. roads

d. primary education

e. cell phone service

In what ways do company investments in research and development create positive externalities?

Will the demand for borrowing and investing in R&D be higher or lower if there are no external benefits?
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