A. On the topic externality, we discussed the cases of consumption (demand) generating a positive externality and production (supply) generating a negative externality.
i) Is it possible for consumption to generate a negative externality? If so, give an example (2.5 marks).
ii) Is it possible for production to generate a positive externality? If so, give an example (2.5 marks).
iii) Why does Ghana government subsidize the purchase of secondary school education, but not the purchase of rice? (5 marks).
B. Because an oligopoly has only a few firms as we discussed during our zoom lectures, interactions among those firms are particularly important. Use your understanding of oligopoly market to discuss the following questions.
i) Shoprite and Melcom are considering expanding into the Togolese supermarket. Devise a simple prisoners’ dilemma game to demonstrate the strategic considerations that are relevant to this decision (7.5 marks).
ii) On July 15, 2016, the world price of crude oil dropped to $70 a barrel, its lowest level in more than two years. This drop in price occurred on the same day that OPEC announced that it will cut daily production of crude oil by 2 million barrels. Why would the price of crude oil fall at the same time that OPEC announced a cut in production, and shouldn’t lower production lead to higher prices? (6.5 marks).