QUESTION 4 (Total: 15 marks) Suppose good X is supplied by a monopoly firm, Just Co. which charges a single, profit- maximising price for its product. Suppose also that Just Co. has a linear and upward- sloping marginal cost (MC) curve. a) A market failure is defined as "a situation in which a market, left on its own, fails to allocate resources efficiently" (Mankiw). Explain whether Just Co. would exhibit a market failure. Illustrate your explanation with an appropriate diagram. (4 marks) b) Now, suppose that the production of good X causes air- and water-pollution in the environment which harms the villages in the area. i. Would you expect this situation result in a market failure if this market were perfectly competitive (instead of a single-price monopoly)? Explain your reasoning, and illustrate this in an appropriate diagram. (3 marks) ii. Is it possible for the profit-maximising quantity of the monopolist to be allocationficient (ie. optimal) without internalising the externality? If yes, why? If no, why not? Analyse and illustrate with a separate diagram. (3 marks) iii. Discuss what would happen to the monopolist's price, quantity and deadweight loss (if any) if the government attempts to internalise the externality by imposing a Pigouvian tax on the monopolist. Illustrate your analysis with an appropriate diagram