i) Draw a demand and supply curve for alcohol absent any externalities and absent any

internalities (i.e., draw a supply curve based on private cost of production and a demand

curve based on consumers' willingness to pay), show equilibrium price and quantity, and

label the anticipated consumer surplus and producer surplus regions.

ii) In a new figure, redraw the curves for the market from part (i.) and add new curves

incorporating the externality and internality. Assume no government intervention (i.e., so

the market remains at the original equilibrium price and quantity). Label with the letter A

any region that is net social surplus and label with the letter B any region that is net social

cost. Label with the letter C the region that is neither net surplus nor net social loss that

was anticipated consumer surplus that is not captured due to the internality. Label with

the letter D the region is that is neither net surplus nor net social loss but is producer

surplus that is offset by the social losses due to the externality.

iii) On the graph in part (ii.), label the socially efficient quantity and the price (charged to

consumers) that would be required to achieve that quantity.

iv) Describe who benefits and who loses if the government restricted output to the socially

efficient quantity, forced the lowest cost sellers to produce, and set the price in (iv.)?