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Happiness can be raised by several ways. You can level up your tavern, the higher the level, the happier your population. You can lower your tax rate through your castle. You can purchase through the shop a 'Mass Hypnosis' which instantly increases the happiness to 100%, though I'm unsure of how long it stays at that level. Also, there is a new "Traveling Faire" clickable link that your FB friends (provided they are playing KoC too) can post to their wall when they see the popup for it. If you see it, click on it and it will give you a temporary happiness boost.