Problem 1: Positive Externalities [10 Points] Suppose we are thinking about a good that provides a positive externality to society. Winter is coming, so we will focus on snow shovels. We will first think about the private equilibrium. The firms who produce snow shovels have a supply curve given below. This is the private supply of snow shovels. Qs-Private = 2p Consumers have a (private) demand for snow shovels given by: QD-Private = 100-0.5p 1. Plot both the private demand and supply with Q on the x-axis and p on the y-axis. Label the private market equilibrium p" and Q" . Also label the y-intercept for both demand and supply and the x-intercept for demand. Show your work for the calculation of p" and Q" . [3 points] Now suppose that society wants more snow shovels out there, because people shoveling their own sidewalk 2. When we say that a private individual will only take into account their own personal interest when deciding if to buy a snow shovel, what does this mean? [1 point] Now suppose therefore that the social demand curve for these snow shovels is given by: QD-Social = QD-Private + 10 3. Given this social supply curve, solve for the socially optimal level of production (Q; ) and the corresponding price level in this equilibrium (p*]. Show your work. [2 points] 4. Is the private market overproducing or underproducing in this example? How do you know? [1 point] We talked in class about different solutions to these externality problems. Pigou had one solution