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Exercise 5 - Externalities (12 points) a) What is an externality? Give an example of a positive and an example of a negative externality. (4

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Exercise 5 - Externalities (12 points) a) What is an externality? Give an example of a positive and an example of a negative externality. (4 points) b) What government policies to externalities are known to you? (Only enumerate - Do not comment) (3 Points) c) Use a diagram to show the optimal Pigouvian tax. Comment on possible problems of the Pigouvian tax. (5 points)

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