Question: 2: PRODUCTION EXTERNALITY: Suppose production creates a negative externality . (2 points)a) Illustrate the Market Failure that arises in Autarchy.Explain the basis for the failure.

2: PRODUCTION EXTERNALITY:Supposeproductioncreates anegative externality.

(2 points)a)Illustrate the Market Failure that arises in Autarchy.Explain the basis for the failure.

(3 points)b)Suppose we now open to free trade (with the free trade priceabove autarchyas above).Show the new market equilibrium and show the market failure.

(2 points)c)DoesHome still gain from free trade now?Show and explain fully.Give the intuition.

(3 points)d)Suppose the free trade price isbelow the autarchy price(eg, home will be an importer).Show the new market equilibrium and show the market failureDoesHome gain from free trade?Show and explain fully.Give the intuition.

3: CONSUMPTION EXTERNALITY:Supposeconsumption, instead, creates anegative externality.

(2 points)a)Illustrate the Market Failure that arises in Autarchy.Explain the basis for the failure.

(3 points)b)Suppose we now open to free trade (with the free trade price above autarchy).Show the new market equilibrium and show the market failure

(2 points)c)DoesHome still gain from free trade.Show and explain fully.Give the intuition.

(3 points)d)Suppose the free trade price is below the autarchy price.Show the new market equilibrium and show the market failureDoesHome gain from free trade?Show and explain fully.Give the intuition.

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