This problem asks you to examine the costs in the market for gasoline. The cost

Question

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 Demand

Explanation / Answer

According to the graph, if govt. doesnot intervene then equilibrium price=2 and quantity=24

MCQ ans is C. Marginal social cost is greater than private cost because social cost=private cost+Externality.

The intervention of limiting output to 12 unit will correct the pollution externality.

A tax of $2 should have corrected the negative externality

Both policy are equally successful.

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