3. Market solutions to correct for negative externalities This problem asks you

Question

3. 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 incidental cost of consuming gasoline. 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.

Explanation / Answer

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 driver will buy ……………million gallons

Correct Answer:-             price of a gallon of gasoline:- $2

Driver will buy:- 20million gallons

Answer:- the correct statements are:-

The market outcome is not socially efficient

The marginal social cost of gasoline is greater than the marginal private cost

Answer:- This intervention …………….correct the pollution externality

Correct Answer:- Will

Answer:- the correct Answer is: Both policies are equally successful

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