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PART A (65%) Answer four of the following questions. Use diagrams where appropriate in your answers. 1. Using an Edgeworth-Bowley Box diagram, explain what is meant by exchange efficiency. 2. What is a negative externality? Outline the solution proposed by Pigou to the problem of negative externalities, using a diagram to illustrate. 3. What is a public good? How can the government decide how much of a public good should be provided? 4. Outline why majority voting is likely to result in an inefficiently high supply of public goods. 5. Explain what is meant by horizontal equity and vertical equity. Briefly discuss whether using income as the basis of taxation is equitable.
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