Department of Economics

PEPF 401: SS2019

Tutorial 5
Dr. Hebatallah Ghoneim
Sheet 5: Externalities, Public Goods and Merit Goods
Question One:

1- Based on the above graph, what is the Social cost curve? What is the economy
experiencing? What is the equilibrium quantity and price? Why this amount is not
efficient?

2- Complete the below table:

Welfare Analysis Consumer Surplus Produce Surplus Total Surplus

Without considering
externality

With considering
externality

3- Show the deadweight loss of this market at equilibrium.

4- How can the government correct market failure?
Question Two:

1- According to the graph shown, which price and quantity combination represents the social optimum for
this market?

2- What can the government do to internalize the externality?

Question Three:
State what is the type of the below goods and Why?
1. Knowledge
2. Fish in the ocean
3. National defense
4. Fire protection
5. Ice-cream cones

Question Four:
The creation of knowledge is a public good. Because knowledge is a public good, profit-seeking firms tend
to free-ride on the knowledge created by others and, as a result, devote too few resources to the creation of
knowledge. How does the government correct for this apparent market failure?

Question Five:
Some advocates of antipoverty programs claim that fighting poverty is a public good. Explain what these
advocates mean by classifying charity as a public good. What does this have to do with the need for
government intervention?