Assume that the city government of Pollutersville taxes the production of electricity in an effort to make the market internalize the external cost imposed on society in the form of pollution of the drinking water.

a. Draw a supply and demand diagram for electricity in Pollutersville. Be sure to label your axes, curves, and intercepts, as well as MSC, MSB, MPC, MSB curves and the amount of the tax.

b. If the government imposes a tax equal to the amount of the marginal external cost generated by each kwh of electricity, is there any deadweight loss in the market?

c. Discuss the changes in welfare for consumers, producers, society, and those individuals affected by the pollution once the tax is imposed.