Abel shares an apartment with Tim. Abel drinks alcohol while Tim hates drinking. The utility

functions for Abel (A) and Tim (T) are as follows:

= 300 + 90 5³

= 300 90

Where x is the number of bottles of alcohol consumed by Abel on a daily basis (and UA

includes the cost of alcohol).

a. Show that Abel will consume alcohol beyond the socially optimal level when the

externality is ignored.

b. Find the optimal Pigovian tax needed to correct the externality.