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3)For special occasions some people purchase and set off fireworks in their backyards. Assume the market for fireworks is perfectly competitive.

  1. Draw a correctly labeled graph of the market for fireworks and show the market equilibrium price and quantity, labeled PE and QE.
  2. Assume that the noise from the fireworks disturbs all of the neighbors. On your graph in part (a), show each of the following.
    1. The marginal social cost curve, labeled MSC
    2. The marginal social benefit curve, labeled MSB
    3. The deadweight loss, if any, shaded completely
  3. Now instead assume that all of the neighbors enjoy watching the fireworks.
    1. In this case, is the market equilibrium quantity of fireworks greater than, less than, or equal to the socially optimal quantity? Explain.
    2. In this case, if the government bans fireworks, will the deadweight loss increase, decrease, or remain unchanged?

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2013 AP Microeconomics Practice Exam Free-Response Questions Free Download

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