Scenario 1:

The demand curve for fire extinguishers slopes downward and the supply curve
for fire
extinguishers slopes upward. The production of the 500th fire extinguisher
entails the
following:
• a private cost of $10;
• an external cost of $0;
• a private value of $9;
• an external benefit of $3.
1.Does the production of fire extinguishers convey a positive externality,
a negative externality, or neither?

Fire extinguishers exhibit positive externalities

2.What is the social value of the 500th fire extinguisher?

The social value is equal to the private value plus the external benefit, so
the social value of the 500 th fire extinguisher is $12.

3. In order to reach the social optimum, should fire extinguishers be taxed

or subsidized? What is the appropriate amount of the tax or subsidy on
each fire extinguisher?

Each fire extinguisher should be subsidised by $3

4. Is the market-equilibrium quantity of fire extinguishers less than, equal

to, or greater the socially-optimal quantity

For the 500th fire extinguisher, the private cost ($10) exceeds the private
value ($9), so the market-equilibrium quantity is less the socially-optimal
quantity
Scenario 2
There are four homes along Belmont Circle, which surrounds a small plot of
land. The land currently has no trees, and the 4 homeowners -- Adams, Benitez,
Chen, and Davis – are considering the idea of contributing to a pool of money
that will be used to plant up to 4 trees. The table represents their willingness to
pay, that is, the maximum amount that each homeowner is willing to contribute
toward each tree.

Adams Benitez Chen Davis

First tree $100 $115 $120 $90
Second tree 50 110 110 50
Third tree 20 100 80 30
Fourth tree 10 50 40 0

1. Refer to Table 11-4. Suppose the cost to plant each tree is $300. How many
trees should be planted to maximize the total surplus of the four homeowners?
2 trees
2. Refer to Table 11-4. Suppose the cost to plant each tree is $90. How many
trees should be planted to maximize the total surplus of the four homeowners?
4 trees
3. Refer to Table 11-4. Suppose the cost to plant each tree is $380 and the 4
homeowners have agreed to split all tree-planting costs equally. Which
homeowner(s) would be opposed to planting any trees?
Davis
4. Refer to Table 11-4. Suppose the cost to plant each tree is $120 and the 4
homeowners have agreed to split all tree-planting costs equally. How many
trees would Adams prefer to plant?
Adams prefers to plant 2 trees