3.2. Answer the questions:

1. What does an externality refer to?

2. When does an externality arise?

3. When is the impact on the bystander adverse?

4. What is called a negative externality?

5. When is the impact on the bystander beneficial?

6. What is called a positive externality?

7. Discuss negative externalities with your partner?

8. What do negative externalities lead markets to?

9. What do positive externalities lead markets to?

10. What is classic example of a negative externality?

11. Is the marginal benefit to society at P' Q' less than marginal cost?

12, What does the marginal benefit to society at P' Q' results in?

4. An input-output model

4.1. Read the text.

An input-output model is a way of depicting economic relationships between suppliersand producers in an economy. These models can be used for a number of purposes, including prediction of theprofitabilityof an industry and analysis of the effects of changes in the economy. Both national and regional governments have used input-output models to determine where to allocate government funds and to increase efficiency by determining which industries have the greatest economic effect.

The input-output model was evolved into usable form by Wassily Leontief, a Russian-born economist. He developed a way of converting massive amounts of raw economic data collected by companies and governments into matrixes for easier study. These matrixes could then be manipulated to examine the potential results of price changes, material shortages, and other alterations in the economy. Leontief received the Nobel Prize ineconomicsfor this achievement.

Input-output models are usually applied to large scale economic systems but can also be used to analyze individual companies. A close dinput-output model consists of a system which receives no external inputs, and all the outputs of the system are consumed within the system itself. Such systems exist but are rare. More common is the open input-output model, which consists of a system that consumes a portion of its own output and sends the rest to some external entity. For example, an oil company may sell most of its gross output to other companies and retain the rest for its own use.

4.2. Answer the questions:

1. What does an input-output model depict?

2. What can these models be used for?

3. What have national and regional governments used input-output models for?

4. Who did the input-output model evolved into helpful usable form?

5. Why did he convert massive amounts of raw economic data collected by companies and governments into matrixes?

6. What could these matrixes then be manipulated for?

7. What Prize did Leontief receive and why?

8. Where are Input-output models usually applied?

9. Why is a close dinput-output model is called a close one?

10. Is a close dinput-output model is the most common one?

11. How do we call the model, which consists of a system that consumes a portion of its own output and sends the rest to some external entity? Give an example.

4.3. Read the text.

The input and output market in Ethiopia is characterized by inefficiency and hence needs for an intervention from the public. Market development is agreed to be the policy option to enhance the market orientation and income of households. Commercial agriculture and/or market orientation is seen as a key element in achieving growth and poverty reduction. Subsistence production merely for home consumption and surplus for the market is chosen by most small-scale farmers because it is subjectively the best option, given all constraints. However, it is one of the inefficient misallocations of human and natural resources. Population pressure and natural resource constraints have made the practice less and less viable. It is argued that the same households could obtain much higher returns from growing and selling alternative crops through market orientation, rather than producing their own food, which is mainly claimed to be done quite inefficiently.