The graph above shows the marginal revenue, marginal social benefit, marginal private cost, and marginal social cost associated with the production of banana oil. The production of banana oil creates an externality. Use the graph and its labels to answer the following questions.

Is the externality positive or negative? Explain.

Identify the socially optimum output. Explain how you determined your answer.

Suppose that banana oil is produced by a profit-maximizing monopoly. Answer each of the following.

i. Identify the unregulated firm's output. Explain how you determined your answer.

ii. To produce the socially optimum output, should the government tax or subsidize the firms in the banana oil industry? If so, how much should the tax or subsidy be?

Suppose that banana oil is produced in a perfectly competitive industry. Answer each of the following.

i. Identify equilibrium output in the absence of regulation. Explain how you determined your answer.

ii. To produce the socially optimum output, should the government should tax or subsidize the firms in the banana oil industry? If so, how much should the tax or subsidy be?