Tests found high levels of toxic ethylene oxide gas in nearby neighborhoods of a commercial sterilization facility in a locality near Atlanta. This is an example of negative externality, in which the private production costs do not include the full costs that its products/by-products impose on the society.

1. Please use the demand and supply graph to explain why the socially optimal amount of the product produced by this firm is less than individual optimal amount of this products. (5 points)
2. What policies can be used to correct the negative externality in this case? (5 points)