Eric Stevanus 2201756600 LA28

Assignment 3:

Use the following Graphical to answer questions.

a. Refer to the above diagram in which S is the market supply curve and S1 is a supply
curve comprising all costs of production, including external costs. Assume that the
number of people affected by these external costs is large. Without government
interference, what will this market result in?

An overallocation of resources to this product therefore creating inefficiencies where

there should have been less supply than there actually is.

b. Refer to the above diagram in which S is the market supply curve and S1 is a supply
curve comprising all costs of production, including external costs. Assume that the
number of people affected by these external costs is large. If the government wishes to
establish an optimal allocation of resources in this market, what should it?

Government should tax producers so that the market supply curve shifts leftward
(upward) as shown in the image above. Reason why is because the external cost is
already huge, and the fact that this goods affects a huge number of people, it’s more
logical to put the tax on the producers to create efficiency in the market and improve the
social wellfare.

a. Description Where there is asymmetric information between buyers and sellers!

Asymmetric information is describe as a situation where seller have a secret knowledge

or more information on the products that they’re offering than the buyer has, therefore
disrupting the real supply or perhaps demand curve than they should have been if the
information weren’t withold.

For example, lets imagine a world where scientist or other organization choose to keep a
secret that smoking cigarettes aren’t healthy. And they even tell lies that cigarettes
actually beneficial for the people’s health, and for the sake of this example, let’s say that
everyone believed that. Then, the demand for the cigarettes market, would have been
 Eric Stevanus 2201756600 LA28
higher than it should have been, if the people knew that those substances are dangerous
for them.

b. In which buyers will opt out of markets?

Buyers will opt out of the market when there is inadequate information about sellers
and their products. People makes decisions based on their analysis and research to
decide their decisions. So when there is little information regarding the quality of the
product or perhaps the seller reputations, or anything at all that can support the buyer’s
decision to buy the good from that seller, then the buyer will opt out of the market.