Question: Please answer the following questions regarding externalities.

a. Using a supply and demand diagram, demonstrate how a negative externality leads to market inefficiency. You should label the private output and socially optimal output. Also, label the marginal external cost.

b. Suppose this graph represents the result of a company producing air pollution on a particular community? What is a way to remedy the solution to remedy the externality?

c. Using a supply and demand diagram, demonstrate how a positive externality leads to market inefficiency. You should label the private output and socially optimal output. Also, label the marginal external benefit.

d. Suppose the graph in (c) represents the following situation: To produce honey, beekeepers place hives of bees in the fields of farmers. As bees gather nectar, they pollinate the crops in the fields, which increases the yields of these fields at no additional cost to the farmer. Suppose Bob the beekeeper and Frank the farmer live next to each other. Bob’s bees fertilize Frank’s crops at no cost to Frank. Suppose Bob has a right to receive compensation for the benefit his bees provide. How might a solution to this externality be reached? How do you know this solution will work?