Question: 4.) Suppose we have a market with a negative externality. Sketch the market and label the efficient point and the market equilibrium point (if they

4.) Suppose we have a market with a negative externality. Sketch the market and label the efficient point and the market equilibrium point (if they differ). The government wants to create cap-and-trade system for this market.

a. If they have the information you have, how many permits would they supply in this market? (You

can just label it on your graph, obviously, you don't have any numbers to be specific)

b. Does the price change in this market as a result of the market cap? If so, label the new price.

c. Do the more or less efficient firms end up with the permits?

d. Do the firms who don't end up with permits completely lose out?

5.) Now imagine we have a market with a positive externality, say research and development into batteries (so that alternative energy sources become more cost-effective).

a. What is the best policy to increase the private production of this good?

b. Sketch the effect of giving customers a subsidy for buying the good. Can that get us towards the efficient level? What does it do to the price that producers receive?

c. Sketch instead the effect of subsidizing the production of that good. Can that get us towards the efficient level? What does it do to the price that producers receive?

d. Which scheme do producers prefer? How about consumers?

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