Market Failure (25 points):First off, lets take a look at the various ways markets can fall short of their promises. Be sure to be very detailed and through with your answers. Each question should be answered with at least 200 words.

1. (10 points) What is an externality? Be detailed in your answer. Give an example of both a positive and a negative externality and justify your choice.

2. (5 points) What is the Coase Theorem? How does it attempt to solve the issue of externalities? Give an example of the Coase Theorem at work and justify your choice.

3. (10 points) On the following graph draw a negative externality to which Coasean Bargaining would be a possible solution (i.e. where the net social gain is greater than the net social cost). Indicate the area of the net social gain and the net social cost and mark both the Pareto-efficient equilibrium and the market equilibrium. Be sure to label your graph completely.

Market Failure (25 points): First off, lets take a look at the various ways markets can fall short of their promises. Be sure to be very detailed and through with your answers. Each question should be answered with at least 1-2 paragraphs. a. (10 points) What is an externality? Be detailed in your answer. Give an example of both a positive and a negative externality and justify your choice. b. (5 points) What is the Couse Theorem? How does it attempt to solve the issue of externalities? Give an example of the Coase Theorem at work and justify your choice. c. (10 points) On the following graph draw a negative externality to which Coasean Bargaining would be a possible solution (Le. where the net social gain is greater than the net social cost). Indicate the area of the net social gain and the net social cost and mark both the Pareto-efficient equilibrium and the market equilibrium. Be sure to label your graph completely