Answer to Question 1
The marginal product of labor is the additional output produced by one additional unit of labor.
Answer to Question 2
Governments address externalities through Pigouvian taxes or subsidies, named after the economist Arthur Pigou. Taxes and subsidies are levied to ensure that firms internalize externalities. Consider a good with negative externalities. The marginal social cost of the good is greater than its marginal private cost. The government will levy a tax on the good, which is equal to the external cost of the good. This tax makes firms take into account the external damage from the good when it makes its production decisions. Similarly, for a good with positive externalities, the government provides a subsidy to a firm or consumer that is equal to the external benefits from the good. The Pigouvian subsidy raises the individual's marginal benefits of consumption by an amount equal to the external benefits its consumption causes, exactly aligning the individual's benefits with society's benefits.
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