Your consulting firm has been hired by the State of California to help them decide on funding for the Univer- sity of California. Your analysis is based on the following premise: higher education has important spillover benefits for the state. When the workforce is more educated, then it is more likely that collaborations between workers with higher education will collaborate together and lead to new business and technology innovations. Education, therefore, leads to more new businesses, higher paying jobs, and increased economic growth for the state. Background. Before addressing the issue of higher education spending, you need to first explain the concept of an ezternality. You will explain an externality using the example of a surfboard factory located near the Pacific Ocean that dumps its pollution in the ocean, where ocean currents then take it downstream and harm fisheries. a. Explain how pollution is an externality. b. Using a graph, show that there is an over-production of surfboards; that is, without government intervention the private market will produce more surfboards than the socially efficient quantity

a) Externality is the cost benefit or loss to a 3rd party due to any activity that is not under its control. An exampe is pollution. In this scenario, losses to fisheries resulting from pollution by surf factory is an externality over. The pollution created by surfboard factory is not under the control of fisheries.

b) Graph is attached. As the production increases, Marginal Private Cost increases and Marginal Social Benefit decreses. Beyond Q2, Government intervention is requried