Suppose that the EPA has proposed strict controls on the amount of sulfur that diesel fuel contains. These controls were designed to fully offset the cost of pollution generated by diesel fuel vehicles. The effect of the regulation is estimated to increase the equilibrium price of a gallon of diesel fuel by 10 cents. Assuming that the supply of diesel fuel has a positive slope and demand has a negative slope, one can infer that the EPA determined that:
A)the external benefit of using diesel fuel is less than 10 cents.
B)the external cost of using diesel fuel is greater than 10 cents.
C)the external cost of using diesel fuel is less than 10 cents.
D)the external cost of using diesel fuel is equal to 10 cents.

Question

Quizplus · Accepted Answer

With conventionally-sloped demand and supply curves, a vertical shift upward in cost of x cents will lead to a new equilibrium price that is less than x cents, so an observed price increase of 10 cents must have been caused by a vertical shift greater than 10 cents.

Suppose That the EPA Has Proposed Strict Controls on the Amount