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Old cellular phones generate a negative externality when they are consumed because they lead to environmental damage when they are discarded. Each phone creates a marginal external cost (MEC) of $25 when it is thrown away. Suppose the inverse market demand and supply curve for cell phones are given by:
Inverse demand: P = 350 - 3Q
Inverse supply: P = 150 + Q
a) Calculate the competitive market equilibrium price and quantity
b) Calculate the allocatively efficient quantity of cellular phones
c) In a clear and well-labeled graph, show the total environmental cost (TEC) at both the competitive market output and allocatively efficient output level
d) Calculate the change in welfare that society would realize if output shifted from the competitive to the allocatively efficient level
e) Explain how a product tax on cell phones could be used to solve the externality problem.
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