Assume that the daily demand for beer is given by the demand function of Q = 200 - 2P. Further assume that the marginal cost of producing a six-pack of beer is $10, and that the market for beer is perfectly competitive. Assume that each six-pack of does $10 worth of health damage in the form of increased liver cancer risk and a total of $6 worth of increased costs to others in the form of Medicare surcharge increases to finance the added cancer risk. Finally, assume that all consumers are aware of these costs.

1. Assume that each consumer is willing to buy a six-pack for $12, but not a penny more. In this market, where the price is $10, what are the private benefits and private costs incurred whenever he buys a six- pack of beer? Is it privately efficient for him to buy beer at this price?
2. What about the public benefits and public costs? Is it socially efficient for him to buy beer at this price?
3. Draw the demand and private supply curves in a diagram and find the equilibrium quantity of beer that will be produced and consumed in this market.
4. Add the social supply curve to the diagram in (c). What is the socially optimal level of quantity that should be consumed? What is the value of the inefficiency that is caused by the externality?