‘;Consider a hypothetical market for gold. On a diagram show a market demand curve D1 and a market supply curve S1. Show on your diagram the market equilibrium price Pm and the quantity of gold produced qm.

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Unfortunately gold mining pollutes the environment. The costs associated with the pollution is borne by the whole community.

(i) With reference to the diagram you have drawn, does the market supply curve S1 incorporate all the costs of mining gold? Explain.

(ii) Now assume that the government wishes to internalize the pollution costs associated with gold mining by imposing a constant per-ounce tax on all firms in the industry. Show the impact of such a tax on your diagram. What will happen to the equilibrium price and quantity?

(iii) What is the incidence of this tax on suppliers and buyers and on other parties who do not buy or sell gold? Use your diagram to illustrate your answer.

(iv) In general, what determines the incidence of tax on consumers and producers? Explain.

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