10. Market solutions to correct for negative externalities This problem asks you to examine the costs in the market for gasoline. The cost of consuming gasoline comes in two parts: 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 external cost of consuming gasoline. Because external costs result from the consumption of gasoline, the marginal social cost of gasoline exceeds the marginal private cost. The following graph shows the demand for gasoline, the marginal private cost of a gallon of gasoline, and the marginal social cost of producing and consuming gasoline. Demand Scocial PRICE (Dollars per gallon) 0 12 15 QUANTITY (Millions of gallons of 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 |S 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. The marginal social cost of gasoline is greater than the marginal private cost. 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. 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 6 million gallons. This intervention 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 S 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? O Both policies are equally successful O The tax The quantity restriction system