1.Suppose that a commercial vineyard uses pesticides in the production of grapes. As a result, dangerous fumes drift across a nearby town.

a)Is this an example of a positive or negative externality? Explain. (2 Marks)

b)Does the market overproduce or under produce grapes? (2 Marks)

c)To internalise this externality, should the government tax or subsidise the vineyard? Why? (2 Marks)