Answer to Question #296875 in Microeconomics for afsane

Question

Consider the market for fire extinguishers.

a. Why might fire extinguishers exhibit positive externalities?

b. Draw a graph of the market for fire extinguishers, labeling the demand curve, the social-value curve, the supply curve, and the social-cost curve.

c. Indicate the market equilibrium level of output and the efficient level of output. Give an intuitive explanation for why these quantities differ.

d. If the external benefit is $10 per extinguisher, describe a government policy that would yield the efficient outcome.

Answer 1

a) This is because fire extinguishers are essential products and may receive subsidies in their production to make them easily affordable to the public.

b)

Equilibrium output is equal to 400 while efficient output is equal to 500. This quantities differ because the equilibrium output depends on the market demand while efficient output depends on maximum and efficient use of resources.

d) The government can offer subsidies to the producers so as to reduce their cost of production this pushing the production to being more efficient.