Supply and Demand anti-terrorism regulation Edition

a) Suppose that the US Department of Homeland security is concerned about the prevalence of airborne biological weapons in large sporting events in the US. Begin by assuming that there is no government policy yet. Consider the market for a system called Early Warning and Response (eWAR) which detects and eliminates pathogens from heating, ventilation and air conditioning. (HVAC) systems in large buildings. These systems are produced by manufacturing companies and purchased by large building owners. Draw a supply and demand diagram (no need for numbers) that reflects the equilibrium number of eWAR systems produced in the absence of government regulation. Suppose the eWARs are extremely expensive. In one or two sentences, explain your rationale for drawing the graph the way you have.

b) Suppose the government mandated that eWAR be installed in all large buildings holding over 10,000 people. Indicate on the graph what this policy means in terms of the quantity of eWAR installed, the price of eWARs, consumer and producer surplus as well as deadweight loss.

c) Suppose that there is a large benefit to society of installing eWAR that perhaps building owners are not incorporating in to their demand for them. What would the value of this “external” or spillover benefit have to be larger than to make the government program pass a cost benefit criterion?