Externalities. Consider the example of the perfectly competitive steel firm from class. The firm takes the market price p = $35 (per unit of steel) as given and chooses quantity q (units of steel) to maximize its profits. The firm has increasing (private) marginal costs given by the equation MC = 5q. The residents in a nearby town suffer damages from the firm’s emissions of sulfur dioxide. A researcher at a local university has estimated their marginal damages to be given by the equation MD = 2q.

(c) On a single graph, draw both of these outcomes along with the curves for private marginal cost, marginal damages, social marginal cost, and marginal benefits. In the graph, shade the area that corresponds to deadweight loss.