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The following table shows the demand in a local market for gasoline. For simplicity, suppose gas can be supplied at a constant marginal cost of
The following table shows the demand in a local market for gasoline.
For simplicity, suppose gas can be supplied at a constant marginal cost of $2 in this market.
Price | Demand |
$1 | 100,000 |
$2 | 80,000 |
$3 | 60,000 |
$4 | 50,000 |
$5 | 40,000 |
$6 | 35,000 |
$7 | 30,000 |
- If this is a free market, what will the equilibrium price and quantity be?
- Suppose that driving gas-powered cars generates an external cost of $3 per gallon in terms of pollution, contribution to global warming, accidents involving pedestrians and bicyclists, and traffic. What is the efficient outcome for this market?
- If the government decides to use a tax to eliminate this inefficiency, how big of a tax should they use?
- Do you think this Pigouvian tax will be popular? Who will like it? Who will dislike it? Do you think it is politically feasible? Explain in detail.
- Do you have another proposal to push society towards the efficient outcome in a way that will be more politically feasible?
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