2. A market has the inverse demand curve P ^ D * (q) = 300 - 1/2 * q and an inverse supply curve of P ^ D * (q) = 5/2 * q but a total negative externality of E(q) = - 60q (a) Find the competitive equilibrium in this market. (b) Find the marginal social value curve (the sum of the marginal externalities and inverse demand). (c) Find the surplus-maximizing quantity.

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Market Failure Analysis

To understand Market failure, we need to first understand welfare economics. An Italian economist, Vilfredo Pareto stated that allocation of resources in an efficient manner such that an economic change, which harms no one and makes someone better off, indicates an increase in social welfare. It is also called Pareto Optimality, where resources cannot further be reallocated without harming one. This does not apply to those economic changes, which harm some and benefit others. social welfare increases if the utility of any of its members' increases and none decrease in the economy.