The supply curve and demand curve for bottled water given by:
Supply: Q = -100 + 400P
Demand: Q= 1150 – 100P (Notice these are direct, not inverse, supply and demand curves). The competitive equilibrium price and quantity are: PC = $2.50 and QC=900
a) Suppose that the MEC was constant for each unit of output, not increasing with Q, and given by MEC = .5. Calculate the allocatively efficient level of bottled water when this cost externality is present. Also calculate the change in welfare that will occur if the town could move from the competitive output level to the allocatively efficient level. Show your answer in a clearly labeled graph.