(Externalities) Consider an economy with two people A and B. Each consumers two goods, good 1 and good 2, with utility functions UA xA1 ;xA2 and UB xB1 ;xB2 . There is a total endowment E of good 1 in the economy (and no endowment of good 2). Person A and person B can each use as much good 1 as they would like to produce good 2 at a one-to-one rate, and then consume the resulting amount of good 2. Each of them consumes the total amount of good one that is not converted into good 2. Hence, if person A produces xA2 of good 2 and person B produces xB2 , then A consumes xA1 =ExA2 xB2 ofgoodoneandBalsoconsumesxB1 =xA1 =ExA2 xB2 ofgood1.Noticethat we have xB1 = xA1 here, or A and B consume the same amount of good one no matter how much good 2 they produce