3

. The graph below represents the gasoline industry. Answer the next questions using this graph.

4.1. Does the industry create a negative or positive externality? Briefly explain.

4.2. Without any government intervention, what are the equilibrium price and quantity?

4.3. What are the socially optimal price and quantity?

4.4. What is the size of the external cost in this market?

4.5. Give an example of a policy that would internalize this external cost in this industry. Briefly

explain.