Microeconomics BBA133N

Unit -5
Market Efficiency and Externalities

Dr. Ramji
 Components of CIA-III (20 marks)
Units: 4 and 5
Assessment Platform: Google Classroom
Time Duration: 8 - 10 hours
Marks: 20
Date of Submission: 15 th November 2022

Assignment Type: Group (5 students in each group)

This assignment aims to help students understand and examine the behaviour of firms and market
externalities.
Topic: Take any two production firms of your interest and write a detailed assignment on the following
aspects.
1. Identify these firms' cost and revenue structures and make a detailed study on the relationship
between cost and revenue functions.
2. What kind of profit are these firms earning (Accounting profit or economic profit)?
3. Did the profit motive of these firms result in any externality? List out the effect of externality on
society and how did these firms internalize it.
General Instructions: The final word count for the assignment is 1500 words, 12 points, Times New
Roman font, 1" margins, Single spaced, with page numbers included, and listed
on your title page of the document. References and citations are NOT included in the
word limit. Including a title page is mandatory, and the title page will not be included
in the total word count.
Marks Category Standard
5 Depth of understanding and Demonstrates clear understanding
conceptual clarity with 5
or more concepts,
supporting points and
evidence

5 Student accurately identifies cost and

revenue structure with illustration and
Analyze the cost and revenue clearly lists out at least 5 effects of
structure and effect of externality on society.

externality on society.

5 Interpretations are derived strongly

from at least 5 facts from the
collected data and variables
Interpretation supporting
the arguments.

5 Concludes with 5 or more

Conclusion
 Examples of Consumer surplus

1.When you have budget of $1000 for 3D television but due to some festive season offer you get that 3D
television for $600 than your consumer surplus will be $400.

2.When stock market crash and the stocks which are fundamentally strong but due to pessimism are trading
below their real value than for investors it is consumer surplus, same can be applied to other asset classes
like gold, silver, real estate and when there is crash in these markets.

3.When a student is going for coaching of physics but tutor also helps him or her in other subjects than for
a student help in other subjects can be treated as consumer surplus.

4.When you go at restaurant for dinner and restaurant gives welcome drink for free than that welcome
drink can be regarded as consumer surplus.

5.When you take internet connection at home for your official purpose but your whole family uses that
internet for their benefit, like your son or daughter uses internet for visiting education websites or your wife
uses it for learning various food recipes than it can be regarded as consumer surplus.

6.When you go for foreign tour for 7 days but travel agency give you additional day and make it a 8 day tour
package than that 1 additional day can be regarded as consumer surplus from the point of view of
traveler.
Externalities
Introduction
• When markets are functioning well, all the costs and benefits of a transaction for a
good or service are absorbed by the buyer and seller. For example, when you buy
a doughnut at the store, it's reasonable to assume all the costs and benefits of the
transaction are contained between the seller and you, the buyer.
• However, sometimes, costs or benefits may spill over to a third party not directly
involved in the transaction. These spillover costs and benefits are called
externalities.
• A negative externality occurs when a cost spills over.
• A positive externality occurs when a benefit spills over.
• So, externalities occur when some of the costs or benefits of a transaction fall on
someone other than the producer or the consumer.
Negative and Positive Externalities
Restrictions