4. The Role of Government [
Dollars
Per unit
10
8
6
S = MPC = MSC
D= MPB
MSB
10,000 11,0000
Quantity (Q)
A. Label the societal equilibrium as "S" and the private equilibrium as "P." Identify whether the
diagram indicates a positive or negative externality in the market.
B. Advise as the economic advisor whether a government subsidy or tax policy would be
appropriate to address the externality. Justify your recommendation.
C. Given your answer above, explain how the benefit of the subsidy or burden of the tax would be
distributed in an optimal government policy. (Hint: Producer vs Consumer)
D. Please label, calculate and explain the deadweight loss in the absence of government
intervention, considering the externality's impact on market efficiency.