Question 2 Answer the following questions related to Externalities and Market Failure by selecting the correct option or addressing the stated requirement of the question. Ensure that you provide an appropriate rationale for the answer provided included marking use of appropriate diagrams where possible. a) What is the nature of the positive externality associated with research and development? (5 marks) A. Firms that engage in research and development may develop more profitable products. B. Firms that engage in research and development may be able to lower their production costs. C. Research and development may lead to discoveries that make other firms more innovative. D. Firms that engage in research and development tend to pay higher stock dividends. b) Which of the following statements is TRUE? (5 marks) I. In the face of a positive externality, a monopolistic market produces less than the socially optimal quantity of output. Il. If vaccinations create an external marginal benefit, the marginal social benefit of vaccinations will always exceed their private marginal benefit. Ill. In unregulated markets, negative externalities create deadweight losses, but positive externalities do not. IV. In the face of a negative externality, a perfectly competitive market produces more than the socially optimal quantity of output. A. I, II and IV are correct B. Ill only is correct C. I and Ill are correct D. I and IV are correct c) Use the concepts of merit and demerit goods to explain why the government may decide to increase the subsidies for nurseries/preschools and increase the taxes on tobacco products. You are encouraged to make use of wider reading/research as well as applicable diagrams to support your discussions/explanations in this question. (15 marks)