environment, congested nontoll roads, the Town Commons, and congested parks.2. a.Fire extinguishers exhibit positive externalities because even though people buy themfor their own use, they may prevent fire from damaging the property of others. b.Figure 2 illustrates the positive externality from fire extinguishers. Notice that the social value curve is above the demand curve and the social cost curve is the same as the supply curve.c.The market equilibrium level of output is denotedQmarketand the efficient level of output is denotedQoptimum. The quantities differ because in deciding to buy fire extinguishers, people don't account for the benefits they provide to other people.d.A government policy that would result in the efficient outcome would be to subsidize people $10 for every fire extinguisher they buy. This would shift the demand curve upto the social value curve, and the market quantity would increase to the optimum quantity.Figure 83.When the system is congested, each additional rider imposes costs on other riders. For example, when all seats are taken, some people must stand. Or if there isn't any room to stand, some people must wait for a train that isn't as crowded. Increasing the fare during rush hour internalizes this externality.
4.a.(1) Police protection is a natural monopoly, because it is excludable (the police mayignore some neighborhoods) and not rival in consumption. You could make an
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