Question 3 (5 Points): A1, C1, B1

Public finance provides tools to help us think through the regulation of regional externalities such as acid rain, global warming and even the internalities of smoking. Careful analysis of public policy options requires distinguishing truly external costs from costs that are absorbed through the market mechanism, understanding the benefits and costs of alternative regulatory mechanisms to address externalities, and considering whether externalities only or externalities and alternatives, should count in regulatory measures. Now answer the following questions:

1. If the government attempts to internalize these externalities, what are the methods available to the government to correct market disequilibrium?

2. An anti- smoking organization provides the following information about helping a city with one million people getting rid of pollution.

Price of membership	Number of members	Marginal external benefit per member	Marginal cost per member
10	180,000	20	90
15	160,000	30	75
20	140,000	40	60
25	120,000	50	45
30	100,000	60	30
35	80,000	70	15

1. Explain why an anti-smoking organization would generate an external benefit to the society.
2. Derive the demand curve for the anti-smoking
3. Derive the marginal social benefit curve for the anti-smoking organization
4. What is the equilibrium competitive price for membership and number of members?
5. What is the marginal social benefit of membership to the community?
6. To achieve allocative efficiency, how many memberships are required?
7. What is the marginal social benefit for achieving allocative efficiency?