4.A you should be able to do.
Prices act as rationalising and ditribution device, they are sources of income, cost. They are the language of markets, to transmit information b.w buer and seller. Allocate resources, and act as penalities or incentives.
B.
Asymmetric information. Buyer can't match the price difference of one particular good (e.g used car) with it's quailty (car accidents/new parts,replacements) because seller is witholding that information. Therefore, price is inaccurate from the buyer's perspec.
(i)
Research and development.
[In production]
Intially,
P.M.C > S.M.C
and PMB = SMC = SMC
The firm is blinded with the technological spillovers it places on society.
The social costs involved with R&D are very little, while the firm bears the development costs. that is, S.M.C < S.M.B. While P.M.B = P.M.C = SMC
The firm has thus neglected to observe the "price information" or the costs to society, because it only looks at itself.
Thus, a D.W.S.L exists coz society is not at their max. potential of benefits.
Gov. recognises this, subsidies the firm, making their costs of RD fall, enabling them to expland their development projecst.
Increasing RD increases benefits to society, and to the level that SMB = SMC.
[in consumption]
SMB > PMB. i.e SMB > SMC since PMB = PMC initially.
Underactivtity of RD is taking place. Gov. subsidies, firm expands RD operations, until SMB = SMC
(ii)
Traffic Congestion
[In production]
as above, xcept road authority's will TAX those who over use/produce the roads. i.e, commuters, who slow down delievery/courier personel who here are "society". i.e, SMC > SMB, where PMB = SMC.
[in consumption]
Neighbours of the road are suffering higher amounts of noise and pollution, that driving on the congested road. Hence, their SMB is low.
Road authority's should introduce a toll/tax/penalty so that the PMB falls, so that commuters decide its too costly to use the roads, (i.e their Costs+) so that its equal to the society's marginal benefits.
Hope it helps.
edit:
to sum up,
firm's and individuals do not equate their personal benefits and costs that spillover to the 3rd parties (externalities)
(a) positive externailites = in production, costs to society are lower than those who produce. Hence, more should be produced through government help (subsidty)
(b) negative externatilies = in production, costs to society are greater than the firm's, (e.g destroying environment is social responsibility, not a firm's). Hence, gv. should tax them in doing so, or assigned them property rights (Ronal Coasse theory).
