The next graph illustrates a market.

Choose and circle one type of externality from the potential four listed below:

Negative externality in production of $2 per unit of output

Negative externality in consumption of $2 per unit of output

Positive externality in production of $2 per unit of output

Positive externality in consumption of $2 per unit of output

On the graph below, sketch the Societal MC if you chose an externality in production, show the Societal MB if you chose an externality in consumption. (Hint: You can show this with a $2 shift of the appropriate curve Supply or Demand, in the appropriate direction.)

a. Show the amount traded in this market.

b. Show the socially optimal amount of production or consumption in this market.

c. Is there overproduction or underproduction in this market?

d. How much overproduction or underproduction is present with the externality that you correctly constructed?