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 denoted Q market and the efficient level of output is denoted Q optimum . The quantities differ because in deciding to buy fire extinguishers, people don't account for the benefits they provide to others. e. 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 up to the social value curve, and the market quantity would increase to the optimum quantity. 3. Think about the goods and services provided by your local government. Using the classification we said in the class, explain which category each of the following goods falls into:
a. Police protection b. Snow plowing c. Education d. Rural roads e. City streets Answer: a. Police protection is a club good because it is excludable (the police may ignore some neighborhoods) and not rival in consumption. You could make an argument that police protection is rival in consumption, if the police are too busy to respond to all crimes, so that one person's use of the police reduces the amount available for others. In that case, police protection is a private good. b. Snow plowing is most likely a common resource. Once a street is plowed, it is not excludable. But it is rival in consumption, especially right after a big snowfall, because plowing one street means not plowing another street. c. Education is a private good (with a positive externality). It is excludable, because someone who does not pay can be prevented from taking classes. It is rival in consumption, because the presence of an additional student in a class reduces the benefits to others.
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