Answer
a) This is a negative externality.
b) Please see the first graph.
c) This is a positive externality.
d) Please see the second graph.
e) A tax of 3 dollars would balance the externalities.
Work Step by Step
a) The private cost is less than the social cost, so this is a negative externality.
b) The demand curve is the same as the social value curve. There is a social cost, so the social cost curve is shifted above the supply curve. The market quantity and the optimum quantity, respectively, are $Q_{Market}$ and $Q_{Optimum}$. The per-unit amount of the externality is also noted on the graph.
c) The private value of the externality is less than the social value, so this is a positive externality.
d) The social value curve is a shift of the demand curve to the right. There is a social cost, so the social cost curve is shifted above the supply curve. The market quantity and the optimum quantity, respectively, are $Q_{Market}$ and $Q_{Optimum}$. The per-unit amount of the externalities are also noted on the graph.
e) The social cost is currently 5 dollars, and the social value is currently 2 dollars. The net cost is now 3 dollars, so a tax of 3 dollars would balance the cost.
