Garden World Ltd. produces lawnmowers but in the process generates negative environmental externalities that impact on the local environment. The cost of these externalities is valued at 40 per unit of output produced. The firm's demand and supply curves for lawnmowers are as follows: Demand: P = 600 - Q Supply: P = 300 + Q

(a) If the firm ignores the external cost it imposes on the community how much output will it produce? What is the equilibrium price?

(b) Draw a demand and supply diagram for the firm showing the equilibrium price and quantity.

(c) What is the socially optimal level of output? Illustrate this on the diagram you drew in part (b) above.

(d) Ignoring the external costs of production results in a deadweight loss. Clearly illustrate this deadweight loss in the diagram you drew in part (b) above.

(e) What policy measure can the government introduce to ensure that the optimal level of output is produced?

(f) Calculate the impact of the government policy on consumers, the producer, the local community and government revenue.

(g) Does the implementation of the policy measure you suggested generate positive or negative gross social benefits?