1. (20 points) There is a lovely hotel near my old DeMun apartment in St. Louis called the Cheshire Inn. (It has a full-size stuffed grizzly bear in the lobby and is vaguely reminiscent of Stephen King's Overlook Hotel.) Inside is The Fox and the Hound, a bar that, like many other bars, draws those who smoke while they drink. Over the course of this past Saturday evening, the second-hand smoke from each pack of cigarettes that was consumed caused me a little discomfort. Taken cumulatively over all of the bar's patrons, each pack did $2 of damage to non- smokers. The (inverse) demand among smokers for cigarettes is about P = 15 3*Q, while the cost of producing these packs is MC = 1 + Q, (Prices are in $, quantities are in packs). A. In words, how would you model this externality? Draw a graph that roughly illustrates the market failure and is consistent with your modeling approach. B. What is the market outcome for packs of cigarettes at The Fox and The Hound? What is the socially efficient number of packs? How big is the deadweight loss that arises in the market outcome? List two government solutions to this market failure that would reduce dcadweight loss. (A tough one) There were no laws that prevented bars from banning smoking on their own. Do you think the market underprovided no-smoking bars, and, if so, why? P1550