Consider the market for cigarettes in the city of Springville. It appears that the marginal cost of producing cigarettes is constant at $4/pack. Springville's demand for cigarettes is given by the linear inverse demand function, P=20 Q where Q is quantity consumed in thousands of packs per day.

A recent study by local researchers has shown that second-hand smoke caused by each pack of cigarette consumption adds $1.00 to the total cost of health care in the city for non-smokers. Smokers are not harmed by second-hand smoke. They are assumed to be fully aware of the health costsinflicted on them for their own smoking and that they pay for their own health care.

a) Calculate the equilibrium price and quantity of cigarettes sold in Springville. [1 mark]

b) Using a diagram for the market for cigarettes in Springville, show the deadweight loss that exists due to this negative externality.[2 marks]

c) Identify a government policy that can partially or fully eliminate the deadweight loss. Explain using your diagram. [2 marks]