Answer the problem set without limitation of page and word.

1. We analyzed carbon taxes as a way to account for externalities arising from burning fossil fuels in cars. Another policy that has been implemented in the United States has been to subsidize electric vehicles. (a) Start by drawing a graph with the following, using price on the y-axis and quantity on the x-axis i. A demand (marginal private benefit) curve ii. A supply (marginal private cost) curve iii. Market equilibrium (b) Assume that consumers are choosing between electric cars and a higher-emitting form of transportation (e.g., gasoline-powered cars). In this case, choosing an electric car produces a positive externality from the amount of greenhouse gas emissions averted. Assume that this is a fixed amount per unit. i. On your graph, draw the marginal external benefit curve (or line), and the marginal social benefit curve. ii. Identify the deadweight loss from the market equilibrium in part (a). (c) The government wants to provide a per-unit subsidy on electric cars. i. Describe in words the economic rationale for the subsidy. ii. What will the optimal subsidy be? (d) On a new graph, display the following: i. Marginal private and social benefit curves ii. Marginal private cost curve iii. Equilibrium under the subsidy iv. Total amount of the subsidy (e) In this setup, we can classify two types of consumers: marginal consumers, whose behavior is changed by the incentive, and inframarginal consumers, who would have engaged in the incentivized behavior anyways. Label the two types of consumers on your graph. (f) Recall from basic microeconomics that the elasticity of demand is the sensitivity of quantity demanded to price. How do the amounts of marginal and inframarginal consumers (and hence the overall response to a subsidy) depend on the elasticity of demand?