6. Problems and Applications Q6 Which of the following is true about general knowledge? It generates a negative externality. It generates a positive externality. It generates both a positive and a negative externality. It does not generate any externalities. As a result, private firms undertake the efficient amount of basic scientific research. Which of the following policies has the United States adopted in response to this problem? Check all that apply. A progressive income tax Taxing revenue from the National Science Foundation Subsidizing research through the National Institutes of Health It is often argued that this policy increases the technological capability of American producers relative to that of foreign firms. True or False: This argument is correct only if the knowledge provided by basic research is not rival in consumption. True False

An externality occurs when a cost or benefit of an action is not felt by the producer of the said action alone but by others who had nothing to do with the action thereby either increasing or decreasing their welfare. For example, Bees kept for honey pollinating flowers is not felt by the entity keeping the bees alone but by the society at large.

Externalities can be positive or negative in nature. The aforementioned example is a positive externality.

General knowledge is a Positive Externality because it improves the knowledge level of society in general.

2. As a result, private firms would not undertake the efficient amount of basic scientific research.

Private firms would not spend enough on acquiring general Knowledge because it wouldn't be beneficial to them alone if they did.

By subsidising research, the NIH can encourage companies to do more research and learn more about things which will benefit the society at large when the effects of the newly acquired knowledge are disseminated across the society.

When a good is said to be Rival in Consumption, it means that the usage of it reduces it such that the more people who use it, the less of it is available for the next person.

If a good is not rival in production, it means that using it will not reduce it's Quantity or Viability.

If the knowledge provided by basic research is not rival in production then it cannot give US firms the advantage because it will always be viable. To gain an advantage, the basic research must be non-rival in production such that using it reduces the chance of others using it as well this keeping you ahead.

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