1. (The Coase Theorem)Ronald Coase points out that a market failure does not arise simply because people ignore the external cost of their actions. What other condition is necessary? What did Coase consider to be the efficient solution to a negative externality?

2. (Negative Externalities)Suppose you wish to reduce a negative externality by imposing a tax on the activity that creates it. When the amount of the externality produced per unit of output increases as output increases, the correct tax can be determined by using a demand-supply diagram; show this. Assume that the marginal private cost curve slopes upward.

MSC MPC = S a - - - D = MB - - -- * O