Consider a simple model of the market for handguns. Assume that the market is controlled by a monopolist, a single firm with a constant marginal cost of 10 $/unit. To begin, assume that demand for handguns is driven by the enjoyment its owners get from responsibly using them at a shooting range. Assume that the handguns are always stored properly and there are never any accidents where bystanders are harmed in other words, there are no negative externalities. Assume the demand for handguns is summarized by this demand curve: = 110 0.5

Drop the assumption that handguns are always used responsibly. Suppose that, in fact, many people are harmed by handguns that they had no role in purchasing, either due to accidental misuse or intentional crimes. Assume that, on average, these negative externalities harm society by $95 per handgun sold. a) (1 point) Does the Social Marginal Benefit curve lie above or below the demand curve in the presence of this negative externality? By how much? b) (2 points) Given this externality, what is the efficient number of handguns to be sold? c) (4 points) Given your finding, do you think society is better off having a perfectly competitive handgun industry, or a monopolistic handgun industry? Explain in a way that a non-economist could understand.