1) Provide one example of a negative externality and draw a graph depicting the socially optimal quantity and the market quantity. Explain why this is a market failure. Explain the similarities between a negative externality and a common resource.
2) Provide one example of a positive externality and draw a graph depicting the socially optimal quantity and the market quantity. Explain why this is a market failure. Explain the similarities between a positive externality and a public good.
3) Using your graphs for numbers 1 and 2 above, explain in which situation it would be appropriate to use a Pigouvian tax and explain how large the tax should be. Explain in which situation it would be appropriate to use a Pigouvian subsidy and how large the subsidy should be.