This problem asks you to examine the costs in the market for gasoline. The cost
ID: 1194554 • Letter: T
Question
This problem asks you to examine the costs in the market for gasoline.
The cost of consuming gasoline comes in two parts:
Because incidental costs result from the consumption of gasoline, the marginal social cost of gasoline exceeds the marginal private cost.
The following graph shows the demand (marginal private benefit, or MPB) for gasoline, the marginal private cost of a gallon of gasoline, and the marginal social cost of producing and consuming gasoline.
According to the graph, if the government does not intervene in the market for gasoline, the equilibrium price of a gallon of gasoline will be $________, and drivers will buy ________ million gallons.
Which of the following statements correctly describe the market for gasoline? Check all that apply.
The market outcome is not socially efficient.
Society prefers that more than the market output of gasoline be produced.
At the market quantity, the marginal private cost of gasoline exceeds the market price.
The marginal social cost of gasoline is greater than the marginal private cost.
Suppose that government regulators try to deal with the pollution externalities by imposing a binding limit on the quantity of gasoline that can be sold. Together, producers in this market can sell a maximum of 14 million gallons.
This intervention ( Will / Will Not ) correct the pollution externality.
Now, suppose that the government decides not to use quantity limits. Instead, it imposes a tax on gasoline.
According to the previous graph, in order to achieve the efficient quantity of gasoline, the government should impose a tax of $ _____ per gallon.
Both the tax and the quantity restriction policy are solutions to pollution. Based on the previous graph, which policy is more successful in ensuring that the efficient quantity of gasoline is consumed, and that the people who consume it are those who derive the most value from it?
The quantity restriction system
Both policies are equally successful
The tax
1. First, the driver pays the market price for a gallon of gasoline. 2. In addition, other people who live in the area bear a cost because they suffer from the pollution created by consuming gasoline; this is the incidental cost of consuming gasoline. 6 Demand (MPB) Margimal Social Cost Margimal Private Cost 42 49 QUANTITY illions of gallonis of gesolineExplanation / Answer
Answer to 1st blank: $2
Answer to 2nd blank: 28 million
Answer to 3rd question: The marginal social cost of gasoline is greater than the marginal private cost.
Answer to 4th blank:will
Answer to 5th blank: $2
Answer to 6th question: Both policies are equally successful
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