Question

Discuss examples of 1) elasticity, including an explanation of why or how they demonstrate the concept of elasticity; and 2) examples of externalities, again including an explanation of why or how they demonstrate the concept of externalities.

Answer 1

Ans. Elasticity is the %change in quantity demanded due to 1% change in price of the good. For example, coffee, for most of the people, tea is a substitute of coffee, so, when price of coffee increases by1% people feel that their real income has decreased, so, they start shifting to the consumption of tea and because of th presenceof the substitute the demand of coffee will decrease by more than 1% indicating that the demand for coffee is elastic but for those people who cannot decrease consumption of coffee by much irrespective of the price change, so, quantity demanded of coffee will decre By less than 1%, then the elasticity will be less than 1 and for them demand for the coffee will be called inelastic.

Ans. Externality is the effect of one person's decisions on the other person. For example, if there is an industry who dumps waste into the river which kils the fishes in the river, so, the fisherment downstream won't be able to catch large number of fishes, so, their income will fall. This effect on fishermen due to action of he industry is called negative externality.

Suppose a person goes to college for PHD, this PHD not only will increase his income but also will have a positive impact on the society in the form of increased productivity. This effect on society is called positive externality.

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