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Question 1 - This question has 3 parts: Part (a) 3 marks, Part (b) 3 marks and Part (c) 4 marks for a total of 10 marks. (a) In the diagram below, Marginal Social Costs (MSC) are greater than Marginal Private Costs (MPC). What problem is being illustrated in the market diagram below? Ensure you define the problem and make direct reference to the elements in the diagram to support your answer. (3 marks) (b) Which of the 2 equilibria (eA or es) does a free-market reach equilibrium at? Briefly explain why this equilibrium outcome occurs. (3 marks) If the free-market equilibrium is not in the social best interest, identify the socially optimal equilibrium (i.e. eA or es) and what economic policy can used to move the market to that equilibrium. Briefly discuss how your chosen policy works with direct reference to the diagram. (4 marks) Price, Cost ($) $2=MSC P2=MSC=MB S1=MPC P1=MPC=MB D=MB Quantity