Based on the graph: a. In this market, how much is the external cost from the production of each unit of tobacco? To reach the social optimum, should the government provide a subsidy or impose a tax?  If so, how much tax or subsidy? b. Is there a deadweight loss in this market? If so, why is there a deadweight loss?

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Market Failure Analysis

To understand Market failure, we need to first understand welfare economics. An Italian economist, Vilfredo Pareto stated that allocation of resources in an efficient manner such that an economic change, which harms no one and makes someone better off, indicates an increase in social welfare. It is also called Pareto Optimality, where resources cannot further be reallocated without harming one. This does not apply to those economic changes, which harm some and benefit others. social welfare increases if the utility of any of its members' increases and none decrease in the economy.