In a Mexican village, spicy food is highly appreciated by the local population with a market demand curve equal to p(q) = 10 q. In the same village, a factory produces chili sauce with a total cost function equal to TC(q) = 5q, where q is the number of kilograms produced. However, for people living in the close proximity of the factory, the scent of chili sauce in the air causes eye and nose burns. In particular, for each kilogram of chili sauce produced, an additional cost of 2 euros is imposed on those people. (a) Does the scenario described above present a negative externality problem of production or consumption? (b) In the absence of any private or public sector solution to this externality, how many kilograms of chilli sauce are produced? Hint: compute the competitive equilibrium allocation. (c) How many kilograms of chili sauce would it be socially efficient to produce? Hint: compute the Pareto efficient allocation. (d) Suppose a private or public sector solution corrects the market failure associated with this externality. What is the gain in aggregate welfare? Show it graphically. (e) Suggest a Pigouvian tax that would lead to the socially efficient number of kilograms of chili sauce production. How much revenue would the tax raise? Show it graphically.