You are a regulator in your government's Environmental Protection Agency (EPA). Your toxic waste scientists have determined that your largest industry, the chocolate- making industry, is producing a toxic by-product that is polluting the atmosphere. You are told that the chocolate-making industry employs 500,000 workers. These workers' livelihood depends on the production and sale of chocolate.

Your challenge is to deal with the pollution issue and take workers' concerns into account at the same time.

1.From the standpoint of social economic efficiency, show on a graph what needs to happen to the level of production and to the price of chocolate.

2.Even though there will be a loss of welfare (profits) to the chocolate industry from its producing at the point of social economic efficiency, why do we say that there will be a net gain to society? Show on a graph how you determine the net gain.

3.In order to get chocolate production level at the socially efficient level, you decide to subsidize chocolate producers (a Pigouvian Subsidy). Show with a graph how this subsidy would work and EXPLAIN IN WORDS EXACTLY WHY the subsidy would work.