1. Laughing Sun Farms is a local farm. They produce a number of crops and create jobs; unfortunately, in order to get rid of stubble, weeds and debris before planting a new crop, they often burn their fields after harvest. This creates an external cost (pollution), but the company only pays the private costs of farming.

Draw a supply and demand curve and show the price and quantity of crops under these conditions. (private costs only) (1 pt.)

Now on the graph above, show the optimal price and quantity from society's perspective. (include external costs) (1 pts.)

What three things can the government do to push firms that create negative externalities to the optimal price and quantity? (3 pts.)

2. What trade-off does society face if we try to reduce negative externalities? (1 pt.)