Question

3 Externalities: In apartment buildings, fires quickly spread between apartments. Therefore, the decision to purchase a fire extinguisher benefits not only you, but also your neighbors.

a. What kind of externality exists in the market for fire extinguishers?

b. Illustrate this market.  

i. Indicate the equilibrium price and quantity in the presence of the externality as well as the socially efficient price and quantity.

ii. Shade in the area representing the deadweight loss due to the externality.

c. Suggest a policy which will move this market to the social optimum.

Answer 1