extinguishers" labeling the appropriate curves. )ndicate the
market e,uilibriumlevel of output and the socially optimal level of
output. Give an intuitiveexplanation for #hy these ,uantities
differ.
'b( )f the external benefit is *0 per extinguisher" describe a
government
policy that #ould result in the socially optimal outcome.
$"estion %
6arols is risk neutral and has an ancient farmhouse #ith great
character forsale in Slaterville Springs. is reservation price for
the house is *0"000.$he only possible local buyer is 7hitney" #hose
reservation price for thehouse is *50"000. $he only other houses on
the market are modern ranchhouses that sell for *%5"000" #hich is
exactly e,ual to each potential buyersreservation price for such a
house. Suppose that it 6arlos does not hire a
realtor" 7hitney #ill learn from her neighbor that 6arlos house
is for sale and#ill buy it for *80"000. o#ever" if 6arlos hires a
realtor" he kno#s that therealtor #ill out him in touch #ith an
enthusiast for old farmhouses #ho is#illing to pay up to *00"000
for the house. 6arlos also kno#s that if he andthis person
negotiate" they #ill agree on a price of *%50"000. )f realtors
chargea commission of 59 of the selling price and all realtors have
opportunity costsof *%"000 for negotiating a sale" #ill 6arlos hire
a realtor- )f so" ho# #ill totaleconomic surplus be affected-
