Eco-nomics: Roof Tiles and Positive Externalities

Im my Public Policy Analysis class we are studying market failures and appropriate policy responses.  Here is an example from Greg Mankiw's blog today: smog-eating roof tiles.  From the news article:

A California company is selling a “smog-eating” concrete tile roof that it says neutralizes the nitrogen oxides spewed by automobiles.

Boral Roofing says each year, one of its concrete tile roofs on a typical 2,000-square-foot house can break down the same amount of nitrogen oxides as a car’s engine typically produces during 10,800 miles of driving.

When sunlight hits the roof, it activates titanium dioxide, which breaks down the nitrogen oxides in the air into oxygen and nitrates, the company say. The tiles’ smog-fighting ability was proved in extensive laboratory testing and field studies conducted by a European Union consortium of academic and industry experts from 2002 to 2006.

Mankiw then prompts his students by asking for the appropriate policy response. Hmmmm, what a good exam question: Graph the situation, explain the market failure and the resulting efficiency loss and suggest a policy solution. Consider this an easter egg.