1.Higher consumption of alcohol leads to more motor vehicle accidents and, thus, imposes costs on people who do not drink and drive. (10 marks)

a. Illustrate the market for alcohol, labelling the demand curve, the social-value curve, the supply curve, the social-cost curve, the market equilibrium level of output, and the efficient level of output.

b. On your graph, shade the area corresponding to the deadweight loss of the market equilibrium. (Hint: The deadweight loss occurs because some units of alcohol are consumed for which the social cost exceeds the social value.) Explain.

2. Daniel loves watching Downton Abbey on his local public TV station, but he never sends any money to support the station during its fundraising drives. (9 marks)

a.What name do economists have for people like Daniel?

b.How can the government solve the problem caused by people like Daniel?

c.Can you think of ways the private market can solve this problem? How does the existence of cable TV alter the situation?