2·The government has decided that the free market price of cheese a suppose the

Question

2·The government has decided that the free market price of cheese a suppose the government imposes a binding price of cheese is toomarket is too low n the cheese market draw a demand-and supply diagram to show the effect of this policy on the ge or surplus price of cheese and the quantity of cheese sold. Is there a shortage orurp of cheese? b. Producers of chees e complain that the price floor has reduced their total revenue. Is this possible? Explain. c. In response to the producers' complaints, the govern ucers complaints, the government agrees to buy all all the surplus cheese at the at the price floor. Compared to the baic price floor, who benefits from this policy? Who looses? 3. Indicate whether the following activities create a positive or negative externality. a. Late night construction begins on a new bridge, as a result traffic is re-routed past your house while construction takes place. b. A n excavating company polluted a local stream with acid rock.

Explanation / Answer

(3)

(a) Negative externality

Increased traffic past your house will create congestion and air pollution, which will create negative externality.

(b) Negative externality

This acid pollution will be a negative externality imposed on local environment and society.

(c) Positive externality

Sound of children brings satisfaction and happiness in the house owner's mind, which creates positive externality.

(d) Negative externality

If caught, the student (and/or entire class) will be reprimanded, which whill create disturbance and loss of class time. This will be to the detriment of other students, creating negative externality.

(e) Positive externality

Planting flowers will create better environment and lower pollution once the plants grow up. So it creates positive externality for the society.

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