Suggested Answers of BT2 Revision Package - ASKnLearn

Cost/Benefits/$ Welfare loss MSC =MPC+MEC SS=MPC 2mfor aclearexplnDD=MPB=MSB MPC=SS Figure 2 0 Qs Qe F1 races Welfare comparison between Qe and QsWith reference to Figure 1, producers of the F1 event ignore the existence ofexternal costs and will maximize their profits at output Qe, whereMPC=MPB. Qe is not the socially optimum level of output as MSC>MSBresulting in a welfare loss (shaded area). This welfare loss means thatwelfare at Qe will be less than that at Qs where welfare of society ismaximized since MSC=MSB. Hence overproduction occurs at Qe, orresources have been overallocated to the production of the F1 races,resulting in market failure.d (ii)Discuss one possible measure to correct negative externalities arisingfrom events like the F1.Traffic congestion is likely to result as the night race is held in the heart oftown. One possible measure to deal with this negative externality arisingfrom the event would be the use of moral suasion to encourage spectators touse public transport instead if private transport. LTA can work with STB toinform the public about road closures, add more train trips and lengthenoperation hours so that the public can access the race area without havingto drive.The public may not be receptive to this as some feel that trains are a poorsubstitute since they are usually crammed and do not provide seamlesstravel like cars will. This may discourage the public from visiting places thatare around the race areas and cause businesses there to be adverselyaffected. The benefit of such a measure is that it is relatively easy toimplement and reach the majority of the public given the buzz arising fromsuch an event.3