1. Suppose there are three goods in an economy: phosphates (F) (a private good), police protection (a public good) and air (a nonmarket good). The taxes on the production of the phosphates finance the police department, but the phosphates also impose costs on the neighborhood as a result of the negative impact its production has on the local air quality. The relationship between these goods can be represented as follows:

   1. MSBphosphates = 100 - .25F

   2. MPCphosphates = 10 + .15F

   3. MECphosphates = 5 + .05F

Graphically represent these relationships. Find the private and societal equilibriums. Label and calculate the deadweight loss associated with the production of phosphates.

Using a supply and demand analysis of the phosphates labor market, show and explain what happens when labor used to produce phosphates is taxed. Then suppose income from a tax on the production of phosphates is used to reduce the labor tax. Show this change in policy on your graph assuming there is no double dividend and explain what you did. What is meant by a double dividend?