4. Externalities [25 TOTAL POINTS] Consider market for masks. Not everyone values the mask equally: marginal private benefit is 100 - Q and marginal private costs are given by 20 (per Q). Given that wearing masks will help reduce spread of virus, marginal benefit to others is M Bo = 50 (per Q). . a. Draw the marginal private benefit (MPB) marginal social benefit (MSB), marginal private cost (MPC), and marginal social cost (MSC) curves on a graph, labeling clearly the axes and intercepts. Pay close attention to what is on the x-axis and y-axis. [4 points] . b. What is the equilibrium amount of masks? What is the efficient level? [3 points] . c. What is the deadweight loss (DWL) caused by the externality? Shade in the area of the DWL on the graph from part (a). What is the welfare gain from moving to the efficient level of Q? [4 points] . d. For which good is a market absent in this case? [2 points] Government solution: Suppose the government steps in and decides to correct the externality by subsi- dizing masks. . e. Suggest a Pigouvian tax that would induce the efficient consumption. What is the optimal tax rate per unit, and how much subsidy is needed? [5 points] Market solution: The Coase theorem states that "the efficient outcome should occur regardless of which party has the property rights," implying that the market can potentially solve externalities by itself (no need for the government to step in!). . f. Interpret the Coase theorem in the context of this question. What are ways in which the Coase theorem could fail? Give some examples in the context of this question. [7 points]