Answer
a) Fire extinguishers might exhibit positive externalities since the original purchaser of the fire extinguisher is not the only person who could benefit from the fire extinguisher.
b) Please see the first graph.
c) Please see the second graph.
d) Since the external benefit is 10 dollars per extinguisher, the government could offer a subsidy of 10 dollars per extinguisher.
Work Step by Step
a) The fire extinguisher would also stop fire from destroying the property of other people (not just the person who purchased the fire extinguisher).
b) The graph has the demand curve, the supply curve, the social-value curve, and the social-cost curve labeled.
c) The social value curve shifts the demand curve to the right, thus increasing the equilibrium price and quantity. Also, the social cost curve shift the supply curve to the right. Thus, the market equilibrium is less than the optimum quantity.
