S SOCIAL Scenario 2 PRICE S PRIVATE The graph to the right shows the demand for private value gasoline. It also shows the private supply cost of producing gas and the social cost $4.27 associated with producing and consuming gas. Examine the costs and benefits in the market for 3.50 gasoline. Since external costs exist in the consumption of gasoline, the social cost of a gallon 3.00 of gasoline exceeds the private cost. According to the graph if the government does not intervene the equilibrium price of a gallon of gasoline would be If the government does not intervene in the D PRIVATE market for gasoline drivers will consume 100 200 300 400 500 600 700 gallons of gasoline. QUANTITY (In Millions) If the government does intervene in the market for gasoline and impose a tax the equilibrium price of a gallon of gasoline would be the tax on a gallon of gasoline would be and drivers will consume gallons of gasoline. Social Cost = Market Equilibrium (no tax) = Efficient Equilibrium = In graph above highlight the Deadweight Loss due to production. NOTE: A deadweight loss is a cost to society as a whole that is generated by an economically inefficient allocation of resources caused by an externality within the market. The tax creates a deadweight loss because there is a fall in total surplus after the imposition of the tax. It is an additional cost to the consumer and not a burden to the manufacturer of the product