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repe 0. LALCIULICJ Due Date: Thursday 5 March 2020 Directions: Complete all questions on the problem sheet. Answers must be c
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Answer #1

a)

Under the negative externalities, the private equilibrium output is larger than the socially efficient output level.

The private system does not take into account the marginal external cost. Thus, the firm tends to overproduce which is not socially efficient.

b)

The government needs to compel the firm to produce at the socially efficient level. Here the government must impose the Pigou tax on the firm. it would increase the cost of production and firm would be compelled to reduce the level of output.

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