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Unit 1 January 2012 ­ Context 2

Question 1.

An external cost can be defined as a cost faced by a third party for which no compensation is
forthcoming when producing or consuming a good. If there are any external costs in consuming the
good, the social cost will be…

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A merit good is a good or service which generally consist of positive externalities that benefit the
greater society in general. These good/services are provided by the state as the market forces fail
to provide them at an optimal output.

Merit goods are often underprovided because the consumers of these…

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The diagram illustrates that the increased cost of speed camera provision will result in increased cost
for the individual and society, thus making it a demerit good. This means that the cost to the
individual at Q1 from being fined will result in an increase in the cost to…

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