Suppose that demand for a product manufactured in your state is Q = 1,200 - 4P and the supply is Q = 2P. Furthermore, suppose that the Marginal External Cost or damage associated with production of this product is $12 per unit.
a. Sketch this market with output Q on the horizontal axis.
b. How many more units of this product does the free market currently produce than is socially efficient?
c. Calculate the deadweight loss associated with this externality. Shade the area of DWL in your sketch.
d. Explain why deadweight loss is harmful to the economy and what options you would use to address this problem.