2. A steel manufacturer is located close to Kuala Lumpur. During production, it emits carbon monoxide which creates an external cost to the local community. The private cost of production creates the external cost to the public and the car producers incurs the private benefit. Draw a graph to show the market price and quantity and plot the effects of includingexternal costs. Show the socially optimal quantity of steel. (2 marks) Show the area of net welfare loss on your graph. (2 marks) Pigouvian Tax can be employed to deal with the problem of external costs. Show in the graph and explain how the tax can solve the problem. (2 marks)

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