An exchange between a buyer and seller occurs usually when the exchange creates both a consumer surplus and a supplier surplus. Market efficiency occurs when consumer and supplier surplus are maximized. However, in exchanges between buyers and sellers, the concern is around whether society should be only concerned with market efficiency.

1.Describe an experience where a person purchased a product or service whereby they experienced surplus as a consumer. Include the example of the possible purchase made and explain why this is an example of consumer surplus. (2 marks)

2.A negative externality represents a spill over cost to a party not part of the product exchange between buyer and seller. A positive externality represents a spill over benefit to a party not part of the product exchange between buyer and seller. An interesting situation occurs when there is a positive externality. This is interesting because economists state this is a result of market inefficiency or failure. Describe a transaction that resulted in a positive externality and why the transaction would be considered inefficient. To answer this question, a) describe the transaction, b) describe the positive externality, and c) state why, from an economist's viewpoint, this would be considered market inefficiency. (2 marks)