Question

consider in the market for fire extinguishers that there is an external benefit of $10 per extinguisher. What type of externality exists; describe a government policy that would yield a socially efficient outcome?

Answer 1

Answer and Explanation:

To internalize the externality a government should provide a subsidy equivalent to the additional benefit or externality given by the product.

So for the external benefit of $10 received by the society, government should give a $10 subsidy to the buyers of fire extinguishers. This shifts the demand curve towards its right giving Optimum.