1. The information below provides the prices and quantities in a hypothetical market for automobile antifreeze. al':i<;:~ ~r, sartin $1 2 3 4 5 6 7 8 .antit~ Bl!!mand~(f Clluantit~ S~Jl!IR~hird 700 600 500 *400 300 200 100 0 300 400 500 600 700 800 900 1

a. b.

c. d. EXHIBIT Plot the supply and demand curves for antifreeze in Exhibit 1. What is the equilibrium price and quantity generated by buyers and sellers in the market? Suppose that tp.e production of antifreeze generates pollution in\the form of chemical runoff and that the p.olJution imposes a $2 cost on sociery for each gallon of antifreeze produced. Plot the social cost curve in Exhibit 1. What is the optimal quantity of antifreeze production? Does the market overproduce or underproduce antifreeze?

e. Ifthe government were to intervene to make this market efficient, should it impose a corrective tax or a subsidy? What is the value of the appropriate tax or subsidy?