Suppose that a new company specializing in quick (under 5 minutes) automobile oil-changes has opened a number of franchised chains in the local area. The company charges $40 per oil change and currently sells 15,000 oil changes per year. From basic market analysis and observation, it appears that the marginal cost of the firm is $40 per oil change and is independent of the number of oil changes sold.

 

Unfortunately, the company uses a process that results in considerable leakage of hydrocarbon emissions into the air. No federal regulations prevent these emissions, but the local government can impose a tax on oil changes that use this polluting process.

 

An analysis presented by an expert panel indicates that the social cost of the emissions is $10 per oil change. Economists have estimated that the price elasticity of demand for the quick oil changes is -0.5 at the current price and quantity (assuming a linear demand schedule).

 

1. In a correctly labeled graph, illustrate the market for oil changes given the information provided above.