Final answer:
The firm hiring a private security force that benefits the local town is an example of a positive externality. The situation illustrates how demand and supply, not just cost of production, set market prices. Prices can fall below production costs if demand decreases or supply increases.
Step-by-step explanation:
The situation described is an example of how demand and supply determine market prices, rather than the cost of production. If for any output level below qe, a buyer values a unit of goods more than the cost to a seller, and then a firm hires a private security force that inadvertently benefits the town, this could be referred to as a positive externality. A positive externality occurs when a third party benefits from the activities of others without having to pay for those benefits. In this case, the reduced crime benefits not just the company but also the local town.
Market prices can fall below the cost of production if there is a shift in demand or supply. For example, if demand decreases (shifts to the left) or supply increases (shifts to the right), market prices can dip below production costs. This could occur during a going-out-of-business sale or in international markets with an excess supply of goods such as steel or computer chips.