Public Singing and Dancing Performance

Question:

In some public parks, dozens of women from mainland China gave public singing and dancing performances and some elderly residents enjoyed them very much.

(a) Explain, in terms of external benefit, why inefficiency may exist when they perform.  (4 marks)

(b) Suggest ONE way to reduce the inefficiency described in (a).   (1 mark)

Answer:

(a)

There exist positive effects done to others.  (1)

Without compensation, the external benefits create a divergence between private and social benefits. Private benefit is smaller than social benefit.  (1)

This results in MB > MC.  (1)

The production is below its efficient level.  (1)

(b)

The elderly residents pay a price for the external benefits.  (1)