2.A.8

Read chapter 8

Before beginning this assignment, please read chapter 8 and refer to it as you form your answers.

1. Draw a supply and demand diagram that demonstrates the effect of a tax. Label each axis, the supply curve, the demand curve, the price the buyers pay (on the axis), the price the sellers receive after the tax and the quantity bought/sold (on the axis).

2. Label the government revenue collected by the tax on your diagram.

3. Label the deadweight loss associated by the tax on your diagram.

4. Explain why taxes create a deadweight loss.

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2.A.10

Read chapter 10

Before beginning this assignment, please read chapter 10 and refer to it as you form your answers.

1. Using the concept of the bystander, explain why a fire extinguisher has positive externalities. Be very specific in your answer and use full sentences.

2. Draw a graph for a good that has a negative externality. Label the private cost (supply) and private benefit curves (demand). Label the social cost curve or the social benefit curve (whichever is applicable in the case of a negative externality). Label the market price and quantity (equilibrium). Label the socially optimal quantity.

3. When a good has a negative externality, does the market produce too much or too little of the good?

4. What action can a government take to improve the market outcome (to make the market producer closer to the socially optimal quantity).

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