The demand for cigarettes is given by P = 500 – 2Q. Cigarettes are manufactured at a constant marginal cost of 50 and sold in a competitive market.

a. What is the quantity of cigarettes sold in equilibrium?

b. If cigarettes generate a marginal external cost of MEC = 0.1Q, what is the socially optimal level of cigarettes?

c. Draw a diagram illustrating the private and social MC curves and the demand curve. Point out the private market quantity, the socially optimally quantity and the social welfare cost.