Principles of Microeconomics Problem Set 5:
1)    In a free market without government intervention producer will produce at a point E mentioned in the graph, where demand D (Marginal Private Benefit (MPB) = Marginal Social Benefit (MSB)) equals to supply s (Private marginal cost) with Q* level of output that has negative externality, because it involves more cost for a producer to produce social optimal level of output Q1 at point E1 and also producers profit will be reduced. Hence producer will produce more output that has negative externality in a free market.
Graph of output that has negative externality produced in the free market
    
2)    Graph of output that has positive externality produced in the free market:
The above graph indicates the production of output that has positive externality .Producer will produce Q1 level of output that has positive externality with price p1 at a point A where demand and supply equals in the market. If producers try to increase the output to Q2 will result in reduction of producer benefit by increasing the cost of producing the output and also it is considered to be a under production. Therefore producer in a free market will tend to produce lesser output that has positive externality.
3)    Command and Control policies involved in fixing the amount of pollutant that should be emitted across the firms while cap and...