Positive And Negative Externalities ON THE Subway System Economics Essay

(a) Negative externality. A negative externality may be defined as a cost arising from an financial activity which influences somebody apart from the people engaged in the economical activity and is also not fully shown in prices.

A typical example would be of a steel mill which includes been shifted into a town which up to now has clean air. To be able to produce steel, it has payed for land, labour, capital and entrepreneurship. The price costed by the operator shows only the costs incurred. The operator doesn't have to pay the price of cleaning up the smoking given off by the mill but people locally pay that cost in the form of dirtier clothes, dirtier autos as well as perhaps even more respiratory illnesses.

(b) Positive externality. Positive externalities are benefits which happen from monetary activities which effect on parties that are not directly involved in the transaction. Prices do not mirror the full profit in use of something or service.

For illustration, a beekeeper can acquire honey from beehives, however the bees will also pollinate encircling fields and therefore aid farmers. Farmers do not pay anything to reap the benefits of pollination.

(a) A subway system might create a negative externality by means of noise air pollution to residents. This will normally direct result since such areas get commercial activity. However, if the subway system buys the property about the new channels, such negative externality will be reduced or eliminated as you will see less or no residential property and more commercial property in the region.

(b) Construction of a subway will raise the value of retail businesses located near to the subway channels as new business have a tendency to be generated due to improved access. When the owners of property close to the new channels buy stocks in the subway system, negative externalities will be balanced since they will begin receiving dividends as a result of such shareholding.

Assignment Question 2

Our costs are extremely high as a result of huge pensions of our own retirees. Will be the pensions of retired employees relevant for potential business decisions?

Retirees are living much longer than anyone expected or accounted for. This is making liabilities look greater as companies recalculate their pension obligations. Since retirees are employees who are already retired, their pension costs are part of the organisation's sunk costs. Sunk costs are historical expenses that are irrelevant for current or future decisions in what to switch or produce. Pension costs are costs which have been created by the decision manufactured in the past and this cannot be modified by any decision that will be made in the near future.

Pension costs are irrelevant for decision-making since employers cannot walk away from other pension responsibilities.

Economists dispute that pension costs shouldn't be considered when making rational decisions. Organisations have pension commitments therefore of previous decisions and such costs need not be looked at when deciding about the organization's future strategies. However, potential shareholders who might be interested to acquire significant shareholding or buy-out the business enterprise need to consider pension obligations during a homework exercise to make an offer.

Assignment Question 3

Explain why the own-price elasticity is a 100 % pure number (with no units) and it is negative.

'The own-price elasticity of demand measures the responsiveness of the quantity demanded to changes in the price tag on the item' (Png & Lehman, 2007: 53). Through this, professionals can inform the scope to which customers will respond to price decreases or boosts. Own-price elasticity is computed as follows

percentage change in variety demanded


percentage change in price

Pure number

The percentage change in variety demanded is the change in number demanded divided by the average amount demanded. Such change is a real number which does not depend on the systems of strategy. Therefore, if we consider matches as an example, the percentage change will be the same whether we measure volume demanded in bins or individual matches.

The ratio change in price is also a pure number being area of the same formulation.

Negative number

Demand curves normally slope downward, meaning if the price of an item rises, the number demanded will show up. Thus, the own-price elasticity is a negative amount.

Some analysts report own-price elasticities with no negative sign (i. e. as a complete value). Therefore, it is vital to keep in mind that the own-price elasticity is a negative number when this concept is being applied.

Assignment Question 4

Hospitals are the only large buyer of nursing services in many communities. These private hospitals often record shortages of nurses - unfilled positions. Reconcile these two facts, using the idea of Monopsony (Word: A monopsony occurs when a market has only one buyer. A monopoly occurs whenever a market has only 1 retailer. ).

The market for nurses utilized by hospitals is an extremely typical exemplory case of a monopsony. Empirical books however provides blended conclusions. One stand focuses on empirical estimates of nurses labour supply elasticities facing clinics. This research generally detects evidence of upward sloping labour supply curves and concludes that this result helps the lifetime of monopsony (Sullivan 1989, Staiger, Spetz, and Phibbs 1999). Another strand (eg Adamache and Sloan 1982; Hirsch and Schumacher 1995) investigates whether comparative wage and/or occupation outcomes vary regarding hospital attention, labour market size, and so on.

Hospitals have the marketplace power to established the earnings paid to nurses in many areas. However, such clinics are reporting shortages of nurses for various reasons. One reason is the pension of old registered nurses who are retiring from the task force. Another reason is the fact a large number of well qualified nursing applicants are being changed away because medical programs aren't well funded and cannot spend the money for personnel, laboratories, and specialized medical facilities required to fulfill the needs of more medical students. It's been believed that about two-thirds of medical schools switched these qualified people away because of insufficient staff and facilities to teach them.

Even though private hospitals can raise the salaries on offer to fill up the unfilled positions, the shortage will never be resolved. This can persist unless appropriate funding will be provided to teach the well trained nursing applicants which can be being flipped away.

Assignment Question 5

Consider two markets, each which is a duopoly where vendors be competitive on price. In one market, products tend to be more differentiated. For the reason that market, will prices be higher or lower?

Duopoly may be thought as a type of market structure in which there are only two sellers/providers of an good or service.

Most organizations, under duopoly, specialise their development and marketing activities to be able to occupy distinct segments of the marketplace. Several firms offer products to the marketplace which can be highly reliable. This may also include valuable guarantees. Some firms may decide to go for low consistency output and providing less valuable compensation terms or warranties. Firms supplying a highly reliable service or product will normally fee higher prices than those offering low dependability output. A typical example is the non-luxury cars international market. Italian companies specialize in less reliable and less costly autos with less valuable warranties in comparison with Japanese businesses. The latter promotes highly reliable and expensive autos with better warranty deals.

It is frequently observed that companies, under duopoly specialize their production. Some suppliers produce productivity with high reliability you need to include good warranty preparations while other firms manufacture result with less reliability and less attractive guarantee deals but at a lower price. This normally applies to markets for a couple of services, few intermediate goods and durable goods.

Assignment Question 6

Compare the next means of paying a legal professional in terms of the incentive for effort:

Hourly rate in which the lawyer receives a set dollar amount for each hour of focus on the situation.

Contingency fee, where the lawyer gets a proportion of the amount that the client recovers. If your client loses the legal action, the legal professional gets nothing.

Consumers of legal services pays their lawyer in various ways. However, it is important that before signing any contracts, consumers should educate themselves about legal fees to keep carefully the amount down with the same time receive a quality service.

If a client gets into into an agreement with his attorney whereby an hourly cost will be incurred for each hour allocated to the case, this may lead to absorption of inefficiencies and inexperience by your client. Lawyers normally demand a standard hourly rate and such rate displays the knowledge and reputation. The number of hours of work on the case is determined by the amount in controversy, the type and difficulty of the problem and also client goals.

A contingency charge basis agreement demonstrates that the attorney has enough beliefs in the case which gives more comfort to your client. Such agreements may be reliant upon lots of factors which include the type and complexity of the matter, the level of risk involved, the expenses and the probability of being successful.

Most legal representatives and clients will be more familiar with hourly billing as opposed to the contingency fee way of charging. Under a contingency fee agreement, clients will not have to pay large regular monthly portions to the attorney while the circumstance is still making its way through regulations courts.

Hourly billing transfers all dangers except the risk of not getting paid on clients whereas under contingency cost billing the legal professional is generally bearing the chance. The attorney will receive a lower cost irrespectively of the amount of time allocated to the case if the case is unsuccessful or if your client accepts a reduced arrangement offer.

Assignment Question 7


(a) Why do businesses enter contracts that are intentionally incomplete?

(b) A house management business is considering whether to set up its cleaning service to replace an outside builder. What are the arguments for and against this proposal?

(a) Contracts are occasionally left incomplete on purpose, because one or both celebrations withhold information required to finalise the agreement. This will allow opportunistic behavior. In an incomplete contract, both parties will not normally be covered for every contingent event which can happen.

Incomplete agreements normally arise credited to difficulties in specifying or measuring performance, bounded rationality and asymmetric information. Wording of agreements is oftenly still left hazy in circumstances where it is not easy to assess performance. Such contracts will not include a precise meaning of any vague words used. Bounded rationality is an idea whereby decision-makers have to work under limited and unreliable information. The human being mind has a restricted capacity to evaluate and process information and the decision-maker has a limited amount of time to make a decision. If any get together to the agreement knows information that your other party doesn't know, this will lead to the creation of an incomplete deal.


Arguments because of this proposal

By establishing its cleaning service, the house management business will gain more managerial control. It is easier for an organization to manager its employees somewhat than managing service agency employees.

Continuity of service will not be assured if the provider goes out of business and through establishing an internal department this risk will be taken away.

Keeping the service in-house is also cheaper in comparison with outsourcing.

Arguments against this proposal

More capital will be required therefore of having its cleaning services team. The company must buy cleaning equipment which recently was directly provided by the company.

The company will now have to incur administrative costs such as selecting costs and costs associated with the management of inside cleaning employees.

In addition to the, the company will lose focus on main competencies. Freelancing cleaning services will allow the business enterprise to focus on its core talents and competencies, resulting in the achievement of a competitive advantage.

Assignment Question 8

"Successful firms are those that contain developed resources and functions that are not available, transferable or imitable by other firms. " Does this imply successful firms are monopolist? Explain your answer.

This statement will not imply successful companies are monopolists. A company which has value-creating products, functions and services which cannot be moved or imitated by its rival organizations is thought to possess a lasting competitive benefit.

Having a lasting competitive advantage does not necessarily mean that the firm or its customers know about it. Which means that the company should position itself in the market to clearly express its competitive edge.

"Isolating mechanisms" refer to the ways by which a firm can create a barrier to imitation of resources and functions (Hooley and Greenley 2005, p 96). Such mechanisms can be divided into two organizations: competitive isolating system and customer-based isolating mechanisms. Competitive mechanisms relate with reducing the opponents' skills to imitate. On the other hand, customer-based isolating mechanisms are mental and economic barriers related to customers' brand selection decisions. Companies must design and develop effective mechanisms to accomplish a better competitive position over time.

Sustainable competitive advantage occurs when regardless of the efforts by competitors to neutralize or duplicate the competitive benefits, such benefits still persists. For this to occur, there has to be ongoing asymmetries between organizations.

The resource-based theory of the strong claims that the competitive good thing about a firm is dependent on the valuable resources which it offers at its removal. Such resources and capacities should be scarce and imperfectly mobile to lead to a ecological competitive benefits.

Assignment Question 9

Neoclassical economics, effectively mainstream economics, underpins most of the economic books in the last century. It can, however, have its critics. Use your knowledge of this issue to make clear and touch upon the following affirmation. "Large organizations probably come close to behaving according to the neoclassical ideal of income maximization, but is this a desirable outcome? Doesn't it come at the expense of wider sociable issues. The response to this is the fact neoclassical economics is descriptive and not normative. It addresses such issues with ideas of private versus cultural utility. "

Neoclassical economics is 'an approach to economics that relates resource and demand to a person's rationality and his or her ability to increase utility or income' (Investopedia, 2010).

Microeconomics is dominated by neoclassical economics. The latter together with Keynesian economics forms the neoclassical synthesis, which nowadays dominates mainstream economics. Mainstream economics combines the neoclassical approach to microeconomics with Keynesian method of macroeconomics.

Neoclassical economics can also be criticized for the fact that it depends heavily on sophisticated mathematical models. Typical good examples are those used on the whole equilibrium theory which increases doubts on whether the economy is really described.

Different views are present on whether neoclassical economics falls under the normative or the descriptive branch of economics. Many dispute that it's normative as it attempts to change the planet by recommending insurance policies to increase economic welfare as opposed to descriptive economics whereby economics will try to explain how the economy operates in reality. Some critics argue that in order to concentrate on individuals, neoclassical economists are lacking to analyse if the economic system is steady and desired.

Important aspects of human behavior are ignored because of this of the assumption that individuals react rationally. This increase concerns on these views as to how real these views are. Neoclassical economics criticize firms for not being human being and for the fact that to be able to achieve profit-maximization, it has a cultural impact.

Neoclassical economists created the assumption of 'logical prospects' in modern neoclassical models. This theory can be used to project expectations of future events. Rational prospects theory assumes that expectations do not vary systematically from genuine outcomes and thus assumes that humans do not make mistakes. It really is in reality highly criticized on the basis of realism.

Compatibility of the neoclassical 'basic equilibrium theory' with economies which develop as time passes and produce capital goods is problematic. The Cambridge Capital Controversy debated this matter through the 1960s. Emphasis was made on the idea of development, aggregate theory, capital and the marginal efficiency theory of distribution.

Some critics have the judgment that such innovations learned fatal weaknesses in neoclassical economics. The continued use of numerical models such as game theory, econometrics and linear programming does not mirror any difference from the other branches of economics.

Most criticism shows that neoclassical economics makes many unrealistic assumptions which do not stand for real situations. However, it's important to bear in mind that branch of economics is incredibly influential and still dominates microeconomics.

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