egative Externalities The market for jelly has a supply and demand given by the following: QD=200-10p QS=20p-100 The production of jelly creates an externality with marginal external cost of: MEC = 0.05Q (a) Find the competitive equilibrium price and quantity. (b) Find the CS, PS, and Total External Cost. (c) What is the efficient output (d) What is the deadweight loss?

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Setting Qs=Qd P*=10 and Q*=100 (b) CS=500, PS=250, TEC=250 total welfare = 500+250-250=500 Note: the total external cost (TEC) is the area under the MEC curve up to Q=100. (c) First compute the inverse supply (PMC) and demand (PMB=SMB): PMB=SMB=20-0.05Q (inverse demand) PMC=5+0.05Q Add PMC+MEC=SMC: SMC = 5+0.1Q Efficiency is where SMB=SMC Q=75 (d) DWL=62.5