Suppose the market demand curve for petrol in Sydney is given by

P = 50 - Q

And the market supply curve is given by

P = 10 + Q

Q is in millions of litres. Further, suppose that burning petrol produces an additional marginal cost to Sydney residents of $2 per million litres.

a) Calculate the socially optimal quantity for this market.

b) Is this quantity higher or lower than the competitive market quantity? Why?

c) Do you think Coase Theorem can be applied in this situation? Justify your response.