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Barney Bottomboro lives in the town of Green Acres where he likes to save money, and the Earth, by dumping his garbage into a gigantic compost heap in his backyard. Local officials are concerned about how the smell from Barney’s compost, which permeates the entire neighborhood, affects the local housing market.

Suppose that Barney’s compost heap creates an externality which affects the market for residential housing in Green Acres as shown in the graph.

Without intervention in the housing market, the price and quantity of houses available for sale will be equal to:

A

P1 and Q1.

B

P1 and Q3.

C

P3 and Q1.

D

P3 and Q3.

E

P2 and Q2.

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