1. Describe two negative externalities and two positive externalities. What makes these externalities?

a. Why is the market not likely to provide the optimal level of the externality?

b. Suppose traffic congestion is a negative externality and a city wants to reduce congestion to the optimal level. Describe one approach to doing so. How would that be implemented?

2. How does a public good differ from a private good?

a. Suppose national defense is a public good. Do you think this public good is a normal good? (Provide a definition of a normal good and apply it to national defense.)

b. Suppose addressing climate change is a public good with a large and positive income elasticity of demand. Why might this cause countries to have difficulties addressing climate change? (Explain what the income elasticity in question means for your answer.)

c. Why is it unlikely that the market can address climate change? (Using the Coase Theorem to explain how the market might address climate change and then explain, using just one possible explanation, why that might not work.)