For questions 1 and 2, suppose that the market for soybeans is perfectly competitive and there are no externalities.

• (1) Explain why the market equilibrium is efficient.
• (2) Suppose the government places a price floor on soybeans above the equilibrium price. Describe what will happen to the quantity demanded, the quantity supplied, the demand curve, the supply curve, and the market price. Explain why this policy is inefficient.
• (3) Now, suppose that there is a negative externality in the production of soybeans. Specifically, suppose that the production of soybeans creates $1 in pollution costs for every pound produced. The government is trying to figure out what to do about this. How would you advise them? Explain your answer.