What do you think is the reason behind the increasing divergence between PMC and

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SMC?
The increasing divergence is due to the increasing EMC as the output of steel increases. For low quantities
of steel produced, the air pollution it causes is well diffused into the environment and is hardly felt. As the
output of steel increases, the additional pollutant added into the environment becomes noticeable and can
impose external costs such as respiratory problems and additional healthcare costs. As steel output
increases further, the air pollution can also cause additional problems like acid rain on top of more serious
healthcare problems to third parties. The corrosion of buildings and death of wildlife from the acid rain
causes the EMC to be larger compared to lower quantities of pollution when steel output was lower.

True or false? Explain your answers.

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(a) When a person buys an apple, other consumers have one less apple to buy and hence his action
imposes a negative externality on society.
False. This is not a negative spill-over effects from the consumption of apple. An apple is simply a private
good, ie. it is rivalrous in consumption.
(b) Since negative externalities reduce societal welfare, government should act to remove ALL negative
externalities to improve welfare.
False. Government should reduce the impact of negative externalities up to the point where the
output/consumption is socially efficient and not (necessarily) to point where externalities are removed.

Draw a diagram to show a ban resulting in a bigger welfare loss.

Price

SMC
SS=PMC

DD=PMB=SMB
QS

Qm

Quantity

Which measure or policy is the best in correcting market failure caused by negative

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externalities?
This question serves to ignite a discussion between students. Teachers can provide a context to anchor
this question around. For example, tutors can get students to discuss if market based solutions or nonmarket based solutions are better to address the negative externalities from factory pollution. The pros and
cons of each measure should be discussed and one key message could be that there is no perfect policy
and the best policy is often a combination of measures that complement each other.

Provide some good examples of positive

production externalities.

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POSITIVE EXTERNALITIES - Technology spillover (production of new R&D techniques)
Figure 7: External benefit from production of R&D technologies
Positive Externality

Cost/
Benefit

PMC=SMC where EMC=0

X
PMB
QE

QSE

SMB = PMB + EMB

No. of R&D technologies produced

Define and give examples of PMB, PMC & EMB.

PMB: The satisfaction derived by the consumer from consuming the new technology product.
PMC: The cost of developing the technology i.e. cost of production. Typically, this will be a
large amount
EMB: Other firms (3rd parties) will benefit from the new technologies developed

Exemplification: NASA space technologies, which was primarily developed to aid in achieving their
competencies in space exploration, have been used in other non-space sectors by other
industries. (http://spinoff.nasa.gov/Spinoff2012/pdf/Spinoff2012.pdf)

Explain the diagram clearly the equilibrium output, social optimum output and how the
deadweight loss is derived.
In the diagram above, the market equilibrium occurs when private firms account for their private
benefit and cost, when PMB=PMC at QE. Due to the presence of positive externalities (EMB) of
benefits to economy, the social benefit of producing R&D technologies is higher than the private
benefit. Hence, the social equilibrium occurs when society takes into account of the positive
externalities when SMB=SMC at Q SE (assuming no negative externalities present, PMC=SMC)
There is an underproduction of R&D technologies by Q SE QE. This underproduction created a loss
to society in the form of total social benefit foregone of YZQSEQE , while only having total social cost
savings of only XZQSEQE. This creates a welfare loss or deadweight loss of XYZ.
Other possible examples
External benefits from improved training and education
External benefits from restoration and use of historic buildings
External benefits from development of renewable energy sources

Draw a diagram to show the impact of ignorance on resource allocation in the context

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of smoking

Figure 1: Ignorance (or over-rating) of benefits to oneself leads to overconsumption

Cost/ Benefit
PMC

E
PMBperceived

F
PMBactual
QA

QP

No. of cigarettes smoked

Can you think of other situations in which ones perceived benefits are higher/lower

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than actual benefits?

Cancer Screening Perceived PMB < Actual PMB

Drinking Alcohol Perceived PMB > Actual PMB

Do you think all goods with positive externalities are merit goods and those with

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negative externalities are demerit goods? Explain
No! To qualify as Merit or Demerit goods, goods have to be deemed by the government to be socially
desirable or undesirable leading to under or over consumption/production respectively. Not all goods
which has spill over effects are deemed by the government as over/under consumed/produced.

Identify the key differences between public goods and private goods.

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Distinguishing
Criteria

Private goods

Public goods

Rivalrous in consumption
- Definition: The
consumption of the good
by one person
diminishes the amount
available for another
person to consume.

Yes
No
Explain the concept of Explain the concept of non-rivalry using an
rivalry using an example of example of street lighting
one persons consumption The consumption of street lighting
of good/service such as
by one person does not diminish the
car, running shoes, hair
quantity or quality available for the next
dressing
person.
when one person
enjoy the good, there
will be one less
available for the others
Excludable in
Yes
No
consumption
Explain the concept of Explain the concept of non-excludability
- Definition: Means that it
excludability
using
an using an example of street lighting
is technically possible or
example
of
use
of No single person has to pay to enjoy the
feasible to exclude
smartphones, computers, light provided by street lighting. i.e. it is
anyone who has not paid
big macs
technically impossible
/
prohibitively
for the good/svc from
the direct benefits expensive to exclude anyone who walks on
consuming it once it is
from the consumption the street from benefiting from it even
produced.
of the good is confined though he /she doesnt pay for it directly.
to those who pay for
the vaccine
As an extension, the issue of Provision can be discussed.

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`
Why cant workers move from areas of high unemployment to one that has lower unemployment? Is
the same situation true for Singapore?
This is due to geographical immobility.
This is less of a problem in Singapore due to the small size of the country.

ADDITIONAL QUESTION:
Do you expect Singapores income inequality to worsen this decade?

Possible reason for income inequality to worsen the continued shifting of focus on new areas of
comparative advantage will mean less demand for unskilled/ less skilled workers causing their wages to
become stagnant or in more serious cases to lose their jobs. In contrast, the demand for high skilled
workers continues to increase raising the wages of high skilled workers.
Possible reason for income inequality to improve governments policies implemented can lessen the
income inequality eg. Reskilling programme to ensure workers acquire the required skills to take on higher
paid jobs, tax rebates for low-income families, etc.