Q1) Private marginal benefit for commodity X is given by 9-X, where X is number of units consumed. Private marginal cost of producing X is constant at $3. For each unit of X produced, the external damage of $1 is imposed on members of society.

What kind of externality is being explained? In absence of any government intervention, how much X is produced? Determine the social efficient level of production of X? Compute the gain to society involved in moving from inefficient to social efficient level of production? Sketch a graph which illustrates these two points of production as well as deadweight loss. Propose the approach which the government could take which could lead to efficient level. How much would such approach cost or benefit government in form of increased government tax revenues or increased government costs?