Question

1. Assume the government wishes to address markets where externalities are present. Show using supply and demand analysis the effect of the following Pigouvian taxes and subsidies.
   1. In an attempt to reduce the negative impacts of second hand smoke, the government fines smokers $100 if they are smoking in public
   2. In an attempt to end foreign dependence for oil, the government provides an income tax break to people who buy electric cars.
   3. The government subsidizes firms if they conduct new research into life saving medication.
   4. The government imposes a regulatory tax on power plants that produce nuclear waste.

Answer 1

a. if smokers are to be fined $100 for smoking in public, they would (decrease their supply of smoke, by avoiding smoking in public) avoid smoking in public to save themselves from fine. this will reduce the amount the cigarretes purchased.

b.this will motivate people to purchase electric cars as by doing that they will protect themselves from income tax. this in a way is a situation of lower price , as price here is income tax, hence, the demand for electric car will increase.

c. this would motivate firms to conduct new research, as here they are getting a price for research hence they will supply it.

d. this would discourage the power plants to produce nuclear waste, as cost of that would prove to be high hence, they will reduce their supply.