Hard Econ1 Multiple Choice

Why is B the answer? The definition of a demerit good is that social costs exceed private costs - hence A.

@Alex-Torres Hey, I think there must be a mistake on the mark scheme, because you're right, a demerit good is where social costs exceed private costs. I have a diagram in my notes like A, so I think A is the answer! :s-smilie:

Reply 2

itssimplyme

14

I remember last year when revising this my economics teacher said the examiners had decided to allow A also to be a correct answer. Strictly, it's wrong, but because teachers and textbooks treat externalities solely in that way, the examiners decided to be generous :tongue:

The negative externalities generated when a demerit good is consumed are consumption externalities. This results in the MSB curve to lie below the MPB. By contrast, A shows negative production externalities rather than consumption externalities. - Hope that makes sense!

Reply 3

Alex-Torres

OP

15

Original post by imank

@Alex-Torres Hey, I think there must be a mistake on the mark scheme, because you're right, a demerit good is where social costs exceed private costs. I have a diagram in my notes like A, so I think A is the answer! :s-smilie:

Original post by itssimplyme

I remember last year when revising this my economics teacher said the examiners had decided to allow A also to be a correct answer. Strictly, it's wrong, but because teachers and textbooks treat externalities solely in that way, the examiners decided to be generous :tongue:

The negative externalities generated when a demerit good is consumed are consumption externalities. This results in the MSB curve to lie below the MPB. By contrast, A shows negative production externalities rather than consumption externalities. - Hope that makes sense!

Ah yes - the mark scheme said B, but the examiner's report said this:

"In relation to the Examiners’ view regarding the correct response, Key B, this was the most
demanding question in the test. The Specification states that the classification of merit and
demerit goods depends upon value judgements and may also be subject to positive and
negative externalities in consumption. Benefits in consumption are shown by the marginal
private benefit (MPB) and marginal social benefit (MSB) curves and, by definition, a demerit
good is one for which the marginal social benefits are less than the marginal private benefits,
as illustrated in diagram B. However, response A attracted 57% of students, including many
who otherwise performed amongst the top in the test overall, and the Examiners recognised
that such a large response must have had some basis in what students had been taught.
Some textbooks appear to classify merit and demerit goods as those involving a divergence
between marginal private and social costs, even though these relate to production not
consumption. On this definition diagram A, which shows the MSC curve to the left of the
MPC curve, can be taken to illustrate a demerit good. The Examiners took the view that
because of the difference in interpretation and explanation of merit and demerit goods
apparent in textbooks that it would be unfair to penalize students for selecting a response
which corresponded with what they had been taught. Accordingly responses A and B were
marked as correct giving a combined overall facility of 87% for the question. "

Reply 4

gr8wizard10

21

I'd assume it was B because it's to do with demand and not supply.

Option A would have shown a negative externality being created by the producer.
Option B shows what the social optimal level of demand should be in comparison to the actual level demanded.

I hope I'm not confusing you.

Reply 5

GeorgeAndLennie

20

Sorry, this may be off-topic. But I'm a bit confused. How do you know when something exceeds another? Like the way social cost exceeds private cost? A bit baffled.

Reply 6

imank

Original post by GeorgeAndLennie

Sorry, this may be off-topic. But I'm a bit confused. How do you know when something exceeds another? Like the way social cost exceeds private cost? A bit baffled.

The social cost curve is 'above' the private cost curve, so if you went across to the y axis, the social cost curve would have a higher value. Did that make some kind of sense? :P

Reply 7

GeorgeAndLennie

20

Original post by imank

The social cost curve is 'above' the private cost curve, so if you went across to the y axis, the social cost curve would have a higher value. Did that make some kind of sense? :P

Oh haha! I never knew it was that simple. So anything that will be above the other curve will have a higher value?

(edited 10 years ago)

Reply 8

virginiamyw

2

It's B because demerit good -> tends to be overconsumed which means MPB is greater than MSB

Reply 9

Zenomorph

3

Text book may define demerit goods in terms of costs but here you are asked to apply your knowledge.

A and B are technically correct but the Q asks for the most likely answer.

I would go for B because it makes more sense in an application. usually we think of DGs in terms of consumption and not production because of the application.

Eg) normally Govs want to discourage the consumption of DGs., so they apply an indirect tax based on consumption - they more you smoke the more you pay.

This of course is predicated upon the downward sloping PB curve , as price drops so consumption rises. Naturally this curve is above the SB curve reflecting fact that PB > SB hence a demerit.

Therefore with application in mind B is the best illustration of a DG

But yes Q could be better framed.

Hard Econ1 Multiple Choice

Quick Reply

Related discussions

Latest

Trending

Trending

Articles for you