3) Unit 3: Externality & Pigouvian Tax (10 points) Let's return to our market for coffee that we examined in Problem Set 3. You'll recall that we looked at a welfare analysis of three policies: (1) a price ceiling of $7, (2) an excise tax of $6 per pound of coffee, and (3) opening up to international trade when the world price is $7 per pound. This time, let's imagine that there is an external cost associated with the production of coffee, Price of coffee (per lb) due to pollution from a key piece of machinery, $22.00 and that external cost is estimated by $20.00 economists to be $6 per pound. $18.00 a. On the graph, draw and label the social $16.00 cost curve that reflects the externality. $14.00 $12.00 b. How many pounds of coffee are $10.00 provided by the private market $8.00 (without intervention)? $6.00 $4.00 $2.00 0 What would be the socially optimal 20 40 60 80 100 120 140 160 180 200 quantity of coffee produced? Quantity of coffee (Ibs) c. Without intervention in this market, what is the deadweight loss that arises as a result of the externality? Clearly label the area on the graph and calculate the dollar value. d. What are two market-based policy options that we could use to address the externality? Be specific about the amounts of each intervention.Look back at Question 2 of Problem Set 3 (remember we have an answer key posted as well on the assignment page) and take a look at our analysis of a $6 excise tax. In that case, we were analyzing the tax while assuming that the free market was efficient. Now, in the context of an externality, imagine that the tax is a Pigouvian tax. e. What is the policy goal of the Pigouvian tax? f. What is the impact on the quantity of coffee sold? Does the policy achieve its goal? g. What is the impact of the tax on total surplus / deadweight loss? Is the outcome efficient? (No need to calculate here, we are basing this off of theory.) h. One of the issues with Pigouvian taxes is that it can be difficult to estimate the tax level. Imagine the government inadvertently sets the tax too high, at $7 rather than $6. What would you predict would happen to the market? (No need to calculate anything - base this off of what we know about excise taxes.) Now imagine that the government sets the tax too low, at $5 per pound. What would we predict would happen