Part One - Use the following figure to determine market equilibrium, social optimum, and whether the graph represents a negative externality or positive externality:

In the essay box below, answer the following three questions. Please make sure to number your answers.

1. Refer to Figure 1. Which price and quantity combination represents the market equilibrium?

2. Refer to Figure 1. Which price and quantity combination represents the social optimum?

3. Does this represent a positive externality or negative externality and why?