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Question: The loud music coming from the sorority next to your dorm is a negative externality that can be directly quantified. The accompanying table shows the marginal social benefit and the marginal social cost per decibel (dB, a measure of volume) of music. Volume of music (dB) Marginal social benefit of dB Marginal social cost of dB 90 = 91 36 O 92 30 2 93 24 4 94 18 6 95 12 8 96 6 10 97 0 12 a. Draw the marginal social benefit curve and the marginal social cost curve. Use your diagram to determine the socially optimal volume of music. Practice Questions and Answers from Lesson III-4: Externalities b. Only the members of the sorority benefit from the music and they bear none of the cost. Which volume of music will they choose? c. The college imposes a Pigouvian tax of $3 per decibel of music played. From your diagram, determine the volume of music the sorority will now choose.Question: Smoking produces a negative externality because it imposes a health risk on others who inhale second-hand smoke. Cigarette smoking also causes productivity losses to the economy due to the shorter expected life span of a smoker. The U.S. Centers for Disease Control (CDC) has estimated the average social cost of smoking a single pack of cigarettes for different states by taking these negative externalities into account. The accompanying table provides the price of cigarettes and the estimated average social cost of smoking in five states. State Cigarette retail price with CDC estimate of smoking cost taxes (per pack) in 2006 (per pack) California $4.40 $15.10 New York $5.82 $21.91 Florida $3.80 $10.14 Texas $4.76 $9.94 Ohio $4.60 $9.19 a. At the current level of consumption, what is the optimal retail price of a pack of cigarettes in the different states? Is the current price below or above this optimal price? Does this suggest that the current level of consumption is too high or too low? Explain your answer. b. In order to deal with negative externalities, state governments currently impose excise taxes on cigarettes. Are current taxes set at the optimal level? Justify your answer. c. What is the correct size of an additional Pigouvian tax on cigarette sales in the different states if the CDC's estimate for smoking cost does not change with an increase in the retail price of cigarettes?Question: Planting a tree improves the environment: trees transform greenhouse gases into oxygen, improve water retention in the soil, and improve soil quality. Assume that the value of this environmental improvement to society is $10 for the expected lifetime of the tree. The following table contains a hypothetical demand schedule for trees to be planted. Price of Tree Quantity of trees demanded (thousands) $30 $25 6 $20 12 $15 18 $10 24 $5 30 SO 36 a. Assume that the marginal cost of producing a tree for planting is constant at $20. Draw a diagram that shows the market equilibrium quantity and price for trees to be planted. b. What type of externality is generated by planting a tree? Draw a diagram that shows the optimal number of trees planted. How does this differ from the market outcome? c. On your diagram from part b, indicate the optimal Pigouvian tax/subsidy (as the case may be). Explain how this moves the market to the optimal outcome.2. Uncertainty (20 points) An economy has two agents, Bill and Bob. Bill has $110, and Bob has $200. Utility of agents in this economy is characterized by the following function of income: U = u(y) [log(y -60) if y