Microeconomics: Principles, Problems, & Policies, 20th Edition

Published by McGraw-Hill Education
ISBN 10: 0077660811
ISBN 13: 978-0-07766-081-9

Chapter 4 - Market Failures: Public Goods and Externalities - Discussion Questions: 7

Answer

The government should consider subsidizing the Lojack car recovery system to consumers as it presents a third party benefits and thus is under consumed.

Work Step by Step

The third party in this case would be those who do not consume the Lojack car recovery system nor produce it, but benefit from the decrease crime rate with regards to car thefts, as the efficiency of the system in recovering cars will act as a deterrent against car theft. Thus, there would positive externalities in consumption as third benefits arise during the consumption of the good, and it is a case of market failure as too few resources are allocated to the production of the good. The government could thus opt to subsidize the good to increase supply to the desirable level, but would risk causing prices to increase drastically if the subsidy were given to producers instead of consumers, as this is a case of positive externality in consumption, where the demand curve is deficient as compared to the marginal social benefit.
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