a) Draw a supply and demand showing a market with an initial equilibrium price of $2, and an external cost of 30 cents per unit. Suppose the government imposes a corrective tax of 30 cents per unit that raises the equilibrium price by 10%. Show the new supply / social cost curve. Does the quantity rise or fall?
b) Circle the right answer: With positive externalities, an unregulated market will (under / over) provide the good, and the solution is to (tax / subsidize) the good.