1)Absent any government action or policy, why might firms underinvest in research and development? What can be done (or has been done) to address this problem?

2)

Goods are nonrival if

a. consumption of a good causes positive spillovers to social benefits.

b. consumption of a good by one person does not affect consumption by another.

c. consumption of a good by one person decreases social welfare.

d. it is not possible to prevent an individual from using the good.

e. the quantity demanded of a good increases when incomes increase.

1)In the absence of any government action or policy, firms might under-invest in research and development because firms will be free to exploit resources, without any limit, for producing goods and services. Thus, there will be no need to invest in the research and development program. Therefore, to address this problem, government intervention is necessary to promote sustainable development in the economy. Sustainable development practices would force firms to invest in research and development to minimize the exploitation of resources and maximize production.

2)

• The correct answer is b. consumption of a good by one person does not affect consumption by another.

Goods can be categorized as rival and non-rival goods. Rival goods are those goods whose availability is limited by the consumption by other individuals. That is to say, a rival good can be consumed only by one person. On the other hand, non-rival goods are those goods whose usage does not limit the availability for others. In other words, a non-rival good can be used by multiple people at once. Therefore, the correct answer is b.

In contrast, option a. is a type of definition of positive externalities. Option c. is a type of negative consumption. Option d. is related to good excludability and option e. is related to income elasticity.