3- [Externalities, Polluting industries, and Environmental policies - 70p] Notes: - "Polluting industries" are economic sectors that are major consumers and producers of fossil fuels and the primary sources of greenhouse gas emissions.

- The major consumers of fossil fuels are the transportation sector, electricity producers, manufacturing sector, commercial and residential, and agricultural sectors. - The supply side of the market are producers of fossil fuels (e.g., oil, gas, and coal producers).

- To make things simple, assume that the negative external effect of fossil fuels comes from the demand side of the market, i.e., consumption of fossil fuels.

a- Use a supply and demand diagram to show that a free market for polluting industries could be inefficient. Using words only, explain and discuss the source of inefficiencies [10p].

b- How does a technological innovation in the production of fossil fuels (a reduction in the marginal cost of extracting and producing fossil fuels) affects the efficiency of a free market for polluting industries? Use a supply and demand diagram and explain. Notes: Your graph and explanation should complement each other, and your graphical analyses should include all relevant welfare analyses. [10p].

c- The current war in Ukraine has reduced the global supply of oil (see "Week 6: Application of S&D model" on Blackboard). How does this war affect the efficiency of a free market for polluting industries? Use a supply

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and demand diagram and explain. Notes: Your graph and explanation should complement each other, and your graphical analyses should include all relevant welfare analyses. [10p].