Provide the best response to each of the following. Consider a good with a production process that also produces pollution. Assume that the pollution creates a significant health risk. . What type of externality does the production of this good have? . Is the market by itself efficiently allocating resources? Does the market reflect the full cost/benefits of the good? How could government internalize this externality? . In terms of a supply and demand diagram, how would this look? Consider education. o What type of externality does the production of this good have? . Is the market by itself efficiently allocating resources? Does the market reflect the full cost/benefits of the good? How could government internalize this externality? o In terms of a supply and demand diagram, how would this look? Note: your answers to both questions must include: o Shifts of the supply and/ or the demand curve. The difference between the market quantity and the socially optimal quantity (does the market by itself reflect the full social cost of production, are we over or under allocating resources to production). o Give specific policy the government could use to internalize the externality of the pollution. Pollution and the Social Optimum Price of Steel Social cost (private cost and external cost) External cost Supply private cost) Optimum - - Equilibrium Demand private value) QOPTIMUM QMARKET Quantity of Steel In the presence of a negative externality, such as pollution, the social cost of the good exceeds the private cost. The optimal quantity, QOPTIMUM, is therefore smaller than the equilibrium quantity, @MARKET- Education and the Social Optimum Price of Education Supply (private cost) External benefit Optimum Equilibrium - Social value (private value and external benefit) Demand private value) QMARKET QOPTIMUM Quantity of Education In the presence of a positive externality, the social value of the good exceeds the private value. The optimal quantity, QOPTIMUM, is therefore larger than the equilibrium quantity, @MARKET