The consumption of alcohol creates a negative externality because of car accidents caused by drunks. This clearly has a negative effect on the victims of the drunk driver and on society in general through hospital and emergency service costs.

a)Would placing a tax on alcohol be a socially optimal response to this action? Using an appropriate diagram, show how a tax might help to 'internalise' the externality.

b)Will the Coase theorem provide a good solution to the externality in this situation? Why or why not?

c)Sarah is a responsible drinker. She likes an occasional glass of wine but never drives if she has had any alcohol to drink. She claims that using a tax to prevent drink driving is both unfair and inefficient. Show that taxing all alcohol cannot eliminate all dead weight loss if there are both irresponsible people who drink and drive and responsible people like Sarah.