The private marginal benefit for commodity X is given by 9-X where X is the number of units consumed. The private marginal cost of producing X is constant at $3. For each unit of X produced an external damage of $1 is imposed on members of society. What type of externality is being described? In the absence of any government intervention how much X is produced? What is the social efficient level of production of X? What is the gain to society involved in moving from the inefficient to the social efficient level of production? Please draw a graph that shows these two points of production as well as the deadweight loss. Suggest an approach that the government could take that could lead to the efficient level. How much would such an approach cost or benefit government in the form of increased government tax revenues or increased government costs?
