5. (15 points total) Pigouvian taxes and subsidies are often cited as a simple way to solve the incentive problems caused by externalities.

(a)(5 points) Explain what a Pigouvian tax is and how it can solve externalities.

(b)Provide an example of an externality where Pigouvian taxes are likely to be effective, and an example of an externality where Pigouvian taxes may not be effective. Explain your reasoning. Hint: What do we need to know in order to set up a Pigouvian tax?