1. Show graphically and explain the inefficiency of a tax on a good when there is no externality.

2. Show graphically and explain the inefficiency of a subsidy for a good when there is no externality.

3. Economists advocate charging a price and oppose mandating or subsidizing clean technologies. Give the economists' reasons for opposing mandates or subsidies.

4. Production of steel generates pollution. Draw a Supply and Demand diagram for steel. Assume that initially the government has no environmental policy. Your diagram should have three straight lines: label them S, D, and MSC (marginal social cost). S and D intersect at point K. Assume the environmental damage per unit of steel is $60. With no policy, 200 units of steel are produced and the price of steel is $240 but the socially optimal quantity of steel is 120 units shown at point I. Point J is $60 above K, and point H is $60 below I. Show all of these numbers, and points K and I, J, and H on your diagram.

5. See your figure from question 4. For the 200th unit of steel:

a) What is the marginal benefit (MB) to consumers? $______.

b) What is the marginal private cost of production (MPC)? $______.

c) What is the marginal damage to the environment? $______.

d) What is the marginal social cost? $______.

e) What is the marginal net loss to society? $______.