1. Suppose (because of its sweet smell) that there are positive externalities associated with the production of chocolate. As a result, social marginal cost (SMC) lies below private marginal cost as measured by the height of the supply curve. Supply, SMC and demand are described by Supply: P = 20+Q, Social Marginal Cost: SMC=10+Q, Demand: P=100-Q The home country is small on world markets, and the world price of chocolate is 30. a. Graph supply, SMC and demand and show the free trade equilibrium (on the diagram show the actual numerical values of supply and demand under free trade). Identify the social optimum and calculate the loss relative to the social optimum. b. On the diagram, show the effects of a tariff of 10 levied on chocolate imports. Compute the welfare change relative to free trade. c. Suppose instead of a tariff, a production subsidy of 10 is used instead. Compute the welfare change relative to free trade with this subsidy. d. Which leads to higher welfare, the tariff or the subsidy? Explain. e. Redraw the diagram from part a, and now consider a tariff of 5. Compute the welfare change relative to free trade. Which policy is better, a tariff of 10 or a tariff of 5? Why do you think this is so?