Consolidation Worksheets: NSS Exploring Economics 3 (3 Edition)

NSS Exploring Economics 3 (3rd Edition)
Consolidation Worksheets
Chapter 17 Market failure: externality and public goods
Test Yourself
17.1
In each of the following examples of negative externalities, state the affecting parties (i.e.,
those taking an action), affected parties, private costs, and external costs.
Affecting Affected
Private costs External costs
parties parties
Paul drives on a
congested road.
Billy downloads a
movie illegally on the
internet.
Mr Leung operates a
food stall on a busy
street.
NSS Exploring Economics 3 (3rd Edition) ©1Pearson Education Asia Limited 2019
Consolidation Worksheets (Chapter 17)
17.2
In each of the following examples of positive externalities, state the affecting parties (i.e.,
those taking an action), affected parties, private benefits and external benefits.
Affecting Affected Private External

parties parties benefits benefits
Popular football teams

allow the public to
watch their training
free of charge.
A cinema opens next

to a restaurant.
A property developer
redevelops old
buildings in an urban
area into a large
residential estate.
17.3
A beekeeper keeps bees near a fruit orchard. The bees collect nectar from the orchard and
help pollinate the fruit in the orchard. Explain how an externality may exist.
Answer:
When the bees help pollinate the fruit, the orchard owner’s fruit output (and hence revenue)
(increases / decreases). Since the beekeeper (receives / does not receive) any payment from
the orchard owner, an external (benefit / cost) is involved. Thus, there is a (positive /
negative) externality [or divergence between private and social (benefits / costs)].
17.4
A shop sells stinky tofu near a residential area. The shop gives off an unpleasant smell.
Explain how a divergence between private and social costs may be involved.
Answer:
The unpleasant smell given off by the stinky tofu shop adversely affects the everyday lives of
nearby residents. Since the shop (compensates / does not compensate) the affected residents,
an cost is involved and there is a (positive / negative) externality
(divergence between private and social costs).
17.5
In some villages in the New Territories, it is common for villagers to keep guard dogs. Guard
dogs bark at strangers but not at their owners or people living in the village. Explain, in terms
of externality, why the keeping of guard dogs by some villagers may result in inefficiency.
Answer:
The keeping of guard dogs by some villagers safeguards not only the houses for their
owners, but also those of other villagers. Without receiving any payment, there is a
(positive / negative) externality / divergence between private and social (benefits / costs).
The dog owners would keep guard dogs to a level where marginal social benefit is
(greater than / smaller than / equal to) marginal social cost. Thus, the number of guard dogs
kept is (above / below / equal to) the efficient level.
17.6
The following table gives some examples of externality. For each of them, determine whether
it is a positive or negative externality, and discuss what the Hong Kong government has done
to deal with the externality problem.
Positive or negative
What has the government done?
externality?
Smoking Positive / Negative
Noise pollution caused

Positive / Negative
by construction work
Provision of social
Positive / Negative
services for youths
Provision of medical
Positive / Negative
services for the elderly
17.7
The following table shows examples of the government dealing with the problems of
externalities. Identify whether they are used to solve a positive or negative externality, and
how MPC and equilibrium output would change as a result of the government solutions.
Solving positive Change in MPC due

Change in
Case or negative to the government
output
externality? measures
a. The government imposes
a congestion charge on
road users to deal with the Positive / Negative ↑/↓ ↑/↓
inefficiency caused by
traffic congestion.
b. The government provides
a subsidy to encourage
Positive / Negative ↑/↓ ↑/↓
investment in research
and development (R&D).
17.8
For each of the examples shown in the following table,
(I) determine whether there is a positive or negative externality;
(II) list the affecting parties and affected parties;
(III) state a government measure that may reduce inefficiency;
(IV) state a market solution that may reduce inefficiency.
a. An electricity company b. A local airline produces and

undergoes repairs of its shows promotional videos on its
underground cable on a street, airplanes to introduce Hong
adversely affecting the Kong to foreigners.
businesses of the shops on the
street.
Externality Positive / Negative Positive / Negative
Affecting
parties
Affected
parties
Government
solution
Market
solution
17.9
Classify the following items into private goods and public goods by putting a P in the table.
A book in a A country Ambulance

A lighthouse A traffic light
public library park services
A private good
A public good
Short questions
1.
Determine whether an externality arises in each of the following cases. If yes, is it a positive
or negative externality? If not, why not?
a. Yan sings karaoke alone in a soundproof karaoke room and she sings badly. (2 marks)
b. Peter screams loudly when watching a horror movie at home at late night, awakening his
father. (2 marks)
c. Jane receives a scholarship for her outstanding academic achievements. (2 marks)
d. Neighbours enjoy the smell when Genie cooks. (2 marks)
*e. A famous chef is employed by a TV station to perform on a TV cooking programme.
(2 marks)
Answer:
a. (Yes / No). (1 mark)
(1 mark)
b. (Yes / No). (1 mark)
(1 mark)
c. (Yes / No). (1 mark)
(1 mark)
d. (Yes / No). (1 mark)
(1 mark)
e. (Yes / No). (1 mark)
(1 mark)
2.
Hong Kong Stadium is the largest outdoor multi-purpose recreation and sports venue in Hong
Kong. Occasionally, concerts are held at the stadium.
a. Explain why concerts at Hong Kong Stadium may lead to a divergence between private
and social costs. (3 marks)
b. Explain why concerts at Hong Kong Stadium may lead to a divergence between private
and social benefits. (3 marks)
Answer:
a. The concerts may create for nearby residents. However, the
concert organisers (compensate / do not compensate) the affected residents. As a result,
an is involved. There is a divergence between private and social
costs (negative externality). (3 marks)
b. Nearby residents may enjoy of the concerts. However, the
residents (pay / do not pay) for the music they enjoy. As a result, an
is involved. There is a divergence between private and social benefits (positive
externality). (3 marks)
3.
Many severe car accidents are caused by drink-driving.
a. Explain, in terms of externality, why drink-driving may result in inefficiency in
economics. (4 marks)
b. Suggest TWO possible measures the government can take to reduce the inefficiency
caused by drink-driving. (2 marks)
Answer:
a. Drink-driving increases the risk of , threatening
the lives and safety of other road users. Since the driver (who drinks and drives)
(compensate / does not compensate) the affected road users, an external (benefit / cost)
is involved. There is a divergence between private and social (benefits / costs)
[(positive / negative) externality]. Marginal social benefit is (higher than / lower than /
equal to) marginal social cost. The frequency of drink-driving or the number of drunk
drivers is (above / below / equal to) the efficient level. (4 marks)
b. Possible measures:
●
(2 marks)
●
(2 marks)
4.
When a murder is committed in a flat, the market values of the flat in which the murder is
committed and the neighbouring flats will decrease.
a. Based on the above information, explain why a murder case in a flat may cause an
externality problem. (3 marks)
*b. Knowing that a murder had occurred in a flat, a tenant rents the flat at a rent below the
market average. After he has moved into the flat, he has nightmares almost every night.
Explain why the nightmares may NOT be an externality caused by the murder case in
that flat. (2 marks)
Answer:
a. When a murder occurs in a flat, the market values of the neighbouring flats will
(increases / decrease). Since the owners of these flats (are / are not) compensated, an
external (benefit / cost) is involved. As a result, there is a (positive / negative) externality /
divergence between private and social (benefits / costs). (3 marks)
b. This is because the harmful effect (having nightmares almost every night) on the tenant is
compensated by . (2 marks)
5.
Hong Kong has more than 40 public beaches for swimming.
a. Explain whether an uncrowded public beach is a public good. (3 marks)
b. Sun umbrellas can be rented at most public beaches. Explain whether these sun umbrellas
are public goods. (3 marks)
Answer:
a. (Yes / No), because (1 mark)
it (can / cannot) be consumed by many individuals concurrently. This means that it is
(rival / non-rival) in consumption. (2 marks)
OR
it is (excludable / non-excludable) in consumption. When a person is sunbathing or
swimming in a beach, it (reduces / does not reduce) the amount available to others.
(2 marks)
OR
it is (excludable / non-excludable) in consumption. It is too to exclude
others from using the public beach. (2 marks)
b. (Yes / No), because (1 mark)
they are (rival / non-rival) in consumption. When a person uses a sun umbrella to protect
himself from sunlight, the amount of protection available to others (in terms of the
shadowed area) (is / is not) reduced. (2 marks)
OR
they are (excludable / non-excludable) in consumption. It (is / is not) costly for the
owners of the sun umbrellas to exclude non-payers from using them. (2 marks)
Structured Questions
1.
Mr Lee rented a unit in a commercial building to operate a restaurant. After his restaurant
opened, more rats were found in nearby offices in that commercial building.
a. Explain, in terms of externality, why inefficiency may exist after Mr Lee’s restaurant
opened. (4 marks)
*b. Owners of nearby offices complained that the rats were attracted by Mr Lee’s restaurant.
However, Mr Lee insisted that it is lawful to operate a restaurant in that building and
refused to carry out a rodent control at his own cost.
Suggest ONE possible market solution to the above externality problem if he has the right
to operate a restaurant. (2 marks)
*c. Suggest ONE possible government solution to the above externality problem. (2 marks)
Answer:
a. Mr Lee’s restaurant may generate an external (benefit / cost) because people working in
nearby offices may (gain / suffer) from poor hygiene and the increased number of rats in
that building, but Mr Lee (compensates / does not compensate) them. Hence, an external
(benefit / cost) may be involved. There may be a divergence between
[or (positive / negative) externality]. Mr Lee’s restaurant is producing
at an output level where marginal social benefit is (higher than / lower than / equal to)
marginal social cost, leading to (overproduction / underproduction). (4 marks)
b. The people working in nearby offices may
. (2 marks)
c. The government may
. (2 marks)
Suggested answers
Test yourself
17.1
Affecting Affected
Private costs External costs
parties parties
Increase in travel
Other
Paul drives on a Paul’s fuel cost time and increase in
Paul drivers on
congested road. and time cost the fuel cost of
the road
other drivers
Copyright Loss in revenue for
Billy downloads a
owner(s) of the copyright
movie illegally on Billy Billy’s time cost
the movie owner(s) of the
the internet.
and cinemas movie and cinemas
Mr Leung Mr Leung’s costs
Pedestrians / Part of the street is
operates a food of production,
Mr Leung nearby blocked / poorer
stall on a busy e.g., cost of
residents hygiene
street. ingredients
17.2
Affecting Affected
Private benefits External benefits
parties parties
Popular football Fans of the
Increased skills
teams allow the Popular teams / people Enjoyment of
of players,
public to watch their football who enjoy watching
stronger ties
training free of teams watching training sessions
with fans
charge. training sessions
The possible
A cinema opens next The The cinema’s increase in
The restaurant
to a restaurant. cinema revenue revenue of the
restaurant
A property developer Better
People living Sales revenue
redevelops old The environment and
near the from the
buildings in an urban property facilities,
redeveloped residential
area into a large developer increase in
residential estate estate
residential estate. property prices
17.3
When the bees help pollinate the fruit, the orchard owner’s fruit output (and hence revenue)
increases. Since the beekeeper does not receive any payment from the orchard owner, an
external benefit is involved. Thus, there is a positive externality (or divergence between
private and social benefits).
(Note that nectar from the orchard may also increase the beekeeper’s output of honey.
However, an analysis about the orchard owner benefiting the beekeeper is not required in
answering this question.)
17.4
The unpleasant smell given off by the stinky tofu shop adversely affects the everyday lives of
nearby residents. Since the shop does not compensate the affected residents, an external
cost is involved and there is a negative externality (divergence between private and social
costs).
17.5
The keeping of guard dogs by some villagers safeguards not only the houses for their owners,
but also those of other villagers. Without receiving any payment, there is a positive
externality / divergence between private and social benefits.
The dog owners would keep guard dogs to a level where marginal social benefit is greater
than marginal social cost. Thus, the number of guard dogs kept is below the efficient level.
17.6
Positive or negative
What has the government done?
externality?
Tobacco duty; laws that prohibit
Smoking Positive / Negative
indoor smoking
Noise pollution
Laws that regulate noisy construction work
caused by Positive / Negative
within certain hours
construction work
Provision of social
Positive / Negative Subsidises NGOs that provide these services
services for youths
Provision of
medical services Positive / Negative Elderly Health Care Voucher Scheme
for the elderly
17.7
Solving positive Change in MPC due
Change in
Case or negative to the government
output
externality? measures
a. The government imposes a
congestion charge on road
users to deal with the Positive / Negative ↑/↓ ↑/↓
inefficiency caused by
traffic congestion.
b. The government provides a
subsidy to encourage
Positive / Negative ↑/↓ ↑/↓
investment in research and
development (R&D).
17.8
a. An electricity company undergoes b. A local airline produces and shows
repairs of its underground cable on promotional videos on its airplanes
a street, adversely affecting the to introduce Hong Kong to
businesses of the shops on the foreigners.
street.
Externality Positive / Negative Positive / Negative
Affecting
The electricity company The local airline
parties
Affected Local businesses relying on tourism,
Shops on the street
parties e.g., hotels
Imposing a penalty on the electricity
Government company; OR Subsidising the production of the
solution Regulating the duration of the promotional videos
repair work
The electricity company
compensates the affected shops; OR Local businesses relying on tourism
Market
The shops make a payment to the pay the airline company to produce
solution
electricity company to shorten the and show more promotional videos.
duration of the work.
17.9
A book in a A country Ambulance
A lighthouse A traffic light
public library park services
A private good P P
A public good P P P
Short questions
1.
a. No. (1 mark)
This is because Yan does not impose any effect on others. (1 mark)
b. Yes. (1 mark)
This is a negative externality. (1 mark)
c. No. (1 mark)
Jane does not impose any effect on others in receiving the scholarship. (1 mark)
d. Yes. (1 mark)
This is a positive externality. (1 mark)
e. No. (1 mark)
His service provided to the public is compensated by the wages he receives from the
TV station. (1 mark)
2.
a. The concerts may create unpleasant noise for nearby residents. However, the concert
organisers do not compensate the affected residents. As a result, an external cost is
involved. There is a divergence between private and social costs (negative externality).
(3 marks)
b. Nearby residents may enjoy the music of the concerts. However, the residents do not pay
for the music they enjoy. As a result, an external benefit is involved. There is a
divergence between private and social benefits (positive externality). (3 marks)
3.
a. Drink-driving increases the risk of car accidents, threatening the lives and safety of other
road users. Since the driver (who drinks and drives) does not compensate the affected
road users, an external cost is involved. There is a divergence between private and social
costs (negative externality). Marginal social benefit is lower than marginal social cost.
The frequency of drink-driving or the number of drunk drivers is above the efficient
level. (4 marks)
b. ● Increase the penalty / Impose a penalty on drink-driving
● More frequent inspection of cars with suspected drunk drivers
● Educate the public about the risk of drink-driving
● Increase the tax on alcoholic drinks
(Any TWO of the above or other reasonable answers. 1 mark × 2 = 2 marks)
4.
a. When a murder occurs in a flat, the market values of the neighbouring flats will decrease.
Since the owners of these flats are not compensated, an external cost is involved. As a
result, there is a negative externality / divergence between private and social costs.
(3 marks)
b. This is because the harmful effect (having nightmares almost every night) on the tenant is
compensated by the lower rent he pays. (2 marks)
5.
a. Yes, because (1 mark)
it can be consumed by many individuals concurrently. This means that it is non-rival in
consumption. (2 marks)
OR
it is non-rival in consumption. When a person is sunbathing or swimming in a beach, it
does not reduce the amount available to others. (2 marks)
OR
it is non-excludable in consumption. It is too costly to exclude others from using the
public beach. (2 marks)
[Note: It is sometimes difficult to determine whether a good is non-excludable. In the
pubic exam (multiple choice questions and short questions alike), non-rivalry (whether it
can be consumed by many individuals concurrently) is usually used to determine whether
a good is a public good. Examples: HKDSE 2017, Paper 1, Q3; HKDSE 2012, Paper 1,
Q4; HKDSE 2015, Paper 2, Q1(a)(ii)]
b. No, because (1 mark)
they are rival in consumption. When a person uses a sun umbrella to protect himself from
sunlight, the amount of protection available to others (in terms of the shadowed area) is
reduced. (2 marks)
OR
they are excludable in consumption. It is not costly for the owners of the sun umbrellas
to exclude non-payers from using them. (2 marks)
Structured Questions
1.
a. Mr Lee’s restaurant may generate an external cost because people working in nearby
offices may suffer from poor hygiene and the increased number of rats in that building,
but Mr Lee does not compensate them. Hence, an external cost may be involved. There
may be a divergence between private and social costs (or negative externality). Mr
Lee’s restaurant is producing at an output level where marginal social benefit is lower
than marginal social cost, leading to overproduction. (4 marks)
b. The people working in nearby offices may pay Mr Lee for rodent control. (2 marks)
c. The government may impose stricter restrictions in terms of hygienic conditions when
food and drink licences are issued / renewed.
(Accept other reasonable answer. 2 marks)

Consolidation Worksheets: NSS Exploring Economics 3 (3 Edition)

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Consolidation Worksheets: NSS Exploring Economics 3 (3 Edition)

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NSS Exploring Economics 3 (3rd Edition)

Chapter 17 Market failure: externality and public goods

Affecting Affected Private External

Popular football teams

A cinema opens next

Smoking Positive / Negative

Noise pollution caused

Solving positive Change in MPC due

a. An electricity company b. A local airline produces and

Externality Positive / Negative Positive / Negative

A book in a A country Ambulance

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