Explain, using a fully labelled demand and supply diagram, how the price mechanism reallocates resources following (i) an increase in consumer incomes for a normal good and (ii) a fall in the costs of key factors of production. In each case, refer to changes in consumer and producer surplus.

Evaluate the effectiveness of indirect taxes versus subsidies as policies to correct market failure from externalities (choose either negative externalities of consumption or positive externalities of consumption). Support your evaluation with at least one real-world example.