Question

Answer the following questions, please be thorough in your response.

1. Give an example of a positive and negative externality and what regulations the government would use to correct the negative externality?

2. Choose a product protected by intellectual property rights. Discuss the advantages and disadvantages of that product being protected

Answer 1

1. Externality refers to a consequence of an economic activity that affects a third party but this consequence is not reflected in the market price. It can be divided Into positive and negative externality. Positive externality refers to benefits(MEB) enjoyed by the third party as a result of a firm's action but for which the party has made no payment. Example- park, inoculations. Negative externality refers to negatives costs or consequences faced by a third party due to the firm's or individual's action. Example - smoking, noise pollution, discharge of effluents into a nearby river

A negative externality is induced when the MEC(marginal external cost ) is not taken into consideration

hence MPC+MEC=MSC

MSC=MSB

To internalize the externality the government will put a corrective tax that will be equal to the MEC.

2.IPR consists of trademarks, patents, copyrights, design, geographical indications, and also trade secrets through which property rights are assigned. For instance the trademark of apple or coco-cola. Apple's innovation is an IPR with respect to patent, trademark, and copyright.

Adv-Legally prevents anyone from taking advantage of the good made by the firm and also attracts investors as it deters competitors.

Dis-Setting patents is a very costly and time-consuming affair and leads to a formation of monopoly hence are price makers who can charge any amount.