Suppose the strings of holiday lights used to decorate yards are produced in a perfectly competitive market and that each string purchased creates a positive externality of $1 due to its visual appeal to neighbors.

a. Draw a hypothetical graph for the holiday light market with an upward-sloping supply curve and a downward-sloping demand curve. Label the following:

i. Marginal private cost curve

ii. Marginal social cost curve

iii. Marginal private benefit curve

iv. Marginal social benefit curve

v. Market price

vi. Equilibrium quantity

vii. Socially optimal quantity

b. Explain how the graph would change if all holiday lights were strung indoors where neighbors couldn’t see them.