Demand for flue shots in Honolulu isQ= 5005P, whereQis the number of people(in thousands) who will get the shot for any given priceP. This demand accounts forindividuals' willingness to pay to reduce the chance of flue infection, but it does notaccount the fact that each person inoculated from the flue reduces the spread of infectionto others. The external marginal benefit from flue shots isMEB= 1000.05Q. Thecost of flue shots is $10 each, regardless of how many flue shots are provided.

1. At first blush, this question looks like a question for health economics, but manyenvironmental goods have positive externalities. Provide a few examples of environ-mental goods with positive externalities and explain whether and how the economicsituation is similar to this example.

2. Draw a graph that shows demand, marginal external benefit, and supply of flueshots.

3. Without government intervention, how many people will obtain flue shots and whatwill be the price?

4. Derive an equation for the marginal social benefit of flue shots, and draw this curveon your graph.

5. What is the socially optimal number of flue shots?

6. If the government fully subsidized flue shots, so that individuals paid nothing, wouldwe achieve an economically efficient number of flue shots? If not, would there betoo many or too few? Explain.

7. How large would the subsidy have to be to achieve the efficient number of flue shots?Illustrate this amount on your graph.

8. At the efficient level of subsidy, calculate the following mathematically, and illustrateon your graph:(a) Government expenditures required to implement the subsidy.(b) The change in consumer surplus.(c) The value of the external benefit from the subsidy.(d) The change in producer surplus from the subsidy.