Explain the economic effects of spillover benefits.

i. Explain why the market demand curve understates true demand and what happens next leading to the market failure. Explain the nature of the market failure.

h. Thoroughly and completely explain how spillover benefits are corrected and the economic implications of the corrections.

i. Explain the two approaches used to solve the spillover benefit problem and how they work to solve the problem.

g. Some economic activities also benefit the people who are not actually involved in that activity resulting in the spillover benefits. An excellent example of this is a public park which even benefits the people who haven?t paid for it. They can visit the park and enjoy it. Also, the plants and trees in the park will produce oxygen, which will ultimately benefit society.

This type of market failure arises in the explicit market due to the presence of externalities which may be positive or negative.

i. The market demand curve fails to consider the social benefits and only takes into account the private benefits. Hence, the market fails to provide an optimum level of output.

h. Spillover benefits are generally corrected using subsidies. The government, through subsidy offering, tries to shift the supply so that production is increased, which gives a new equilibrium, and the optimum level of output is achieved.

i. The government can either increase demand or increase the supply of the product.

In the first approach, to increase the demand, the government needs to provide subsidies to consumers, say, in the form of food stamps.

A second approach requires an increase in production or supply by subsidizing production.