Midterm Exam

Midterm Exam

Question 1

Spillover is defined as a side effect arising from or as if from an unpredicted source: Late trains were a spillover of increased ridership. Odors from a rendering plant are negative spillover effects upon its neighbors; the beauty of a homeowner's flower garden is a positive spillover effect upon neighbors. Houses around golf courses are usually more expensive than those near airports. On the surface, it appears that the golf courses have generated uncompensated benefits and the airport uncompensated costs to the nearby house owners. Economists call uncompensated benefits external benefits or positive externalities, and uncompensated costs external cost or negative externalities (Rogers & May, 2003).

But the fact that the value of houses is enhanced by their proximity to golf courses and reduced by their proximity to airports only shows the physical presence of positive and negative spillovers. The presence of physical spillovers does not always mean that these spillovers have not been compensated. Specifically, the houses and golf courses are usually jointly developed by the same company. In other words, the attractiveness of being located next to the golf courses has already been factored into the price of the nearby houses. Similarly, house owners around airports might already have been compensated by the lower prices they pay for their houses.

When the positive or negative physical spillovers have been compensated through price adjustments, the benefits or costs of these physical spillovers are said to have been internalized. After the benefits or costs have been internalized, the physical spillovers might still be visible to outside observers. But these physical spillovers can no longer be considered as externalities because the price adjustments have compensated for any diminution of property rights(Moen et. al. 2004).

Question 2

Financial exclusion can be described as the inability of individuals, households or groups to access necessary financial services in an appropriate form. It can stem from problems with access, prices, marketing or financial literacy, or from self-exclusion in response to negative experiences or perceptions. Several factors are considered major causes of financial exclusion in European countries. They can be broadly grouped into three categories: societal, supply and demand factors(Jayo, 2010). A range of societal factors have been identified as having an impact on people's access to, and use of, financial services. With the increasing diversity of financial institutions and services caused by the liberalisation of financial services markets, it is hard to gain a general overview of the sector and the opportunities available. Studies also reveal a strong correlation between levels of income inequality (measured by the Gini coefficient) in a country and the incidence of financial exclusion. Furthermore, societal changes such as structural changes in the labour market and the rising number of single people and single parents, as well as other demographic evolutions, increase people's vulnerability to financial exclusion. The regulatory context, together with government social and economic policy, also needs to be considered(Unterberg, 2010).

Supply factors take into account a financial institution's criteria for accepting a client, the fees it charges for access ...