Question

Discuss the economic impact of electricity availability on rural communities. b. Discuss the economic concepts underlying the mean-variance model for the

analysis of risk.

c. Discuss the economic concepts underlying risk, uncertainty, and incomplete

markets.

Answer 1

Economic impact of electricity available on rural communities:

Access to electricity is supposed to improve health facilities, education and facilitate economic development in rural communities. However, the matter progress if it is known that this access covers the whole of a community or only a few citizens.

In a wider picture, availability of electricity increases productivity, employment and enterprise creation. However, it is not always sure that the electrification is used for the productive purposes. It may not necessarily improve performance. Affordable technology is more likely to change economic conditions through cost saving. Economic impact of access to electricity in a few points could be:

Increase in savings through improved cookstoves.

Income benefits through new opportunities of work.

Higher educational attainment with the help of electrified households.

Increase in agricultural productivity through higher revenues.

Domestic benefits from lightning and TV.

Reduction in expenses with the use of solar home systems.

Public goods benefits such as decreased environmental contamination.

Improvement in health facilities and reduction in mortality rates.

b.

Economic concepts underlying the mean-variance model for the analysis of risk:

Mean-variance model constitutes a technique that investors use to make decisions regarding financial instruments to invest, depending on the amount of risk they are willing to take. While measuring the risk, investors usually consider potential variance against the expected return of that asset. Mean variance model accounts average variance in the expected return from an investment.

Mean-variance model constitutes mainly of:

1. Variance: Variance measures how the numbers are spread out or how distant they are from the mean or average. While analysing an investment portfolio, variance displays how the returns of a security are spread out during a given time period.

2. Return expected: This is the second component of mean-variance model. It is the estimated return that a security is expected to provide. Since it is an estimation, it may not be 100 percent correct. It is mainly based on the historical data.

C.

Economic concepts underlying risk, uncertainty, and incomplete markets:

Risk, uncertainity and incomplete markets belong majorly in a realistic treatment of almost all the economic problems. Uncertainity and risk depicts that there is no knowledge available of tomorrow's economic environment. Uncertainity and risk go hand in hand. Uncertainity involves fundamentals that could be tastes, resources or technologies and risk depend entirely on such kind of fundamentals.

Economic risk is the chance of loss because all possible outcomes and probability is unknown. All the actions taken are speculative. Uncertainity is when the results of managerial decisions cannot be predicted with absolute accuracy but all possibilities and probabilities are known.

Incomplete market involve mainly two implications i.e volatility of demand and wages inflexibility. The economic agents in incomplete market observe some of the aspects of the economic environment. However, the information is asymmetric. The expectations about future economic developments are mainly based on such observations. Since the information is asymmetric, the expectations are also heterogenous.