Scenario 10-1
The demand curve for gasoline slopes downward and the supply curve for gasoline slopes upward. The production of the 400th gallon of gasoline entails the following:
  a private cost of $2.83;
  a social cost of $3.12;
  a value to consumers of $3.23.
-Refer to Scenario 10-1. Suppose the dollar amount of the externality, per gallon of gasoline, is constant, regardless of how much gasoline is produced. Then the externality could be internalized if producers of gasoline were
A)provided a subsidy of $0.11 per gallon of gasoline sold.
B)provided a subsidy of $0.29 per gallon of gasoline sold.
C)required to pay a tax of $0.29 per gallon of gasoline sold.
D)required to pay a tax of $0.11 per gallon of gasoline sold.

Question

Scenario 10-1
The demand curve for gasoline slopes downward and the supply curve for gasoline slopes upward. The production of the 400th gallon of gasoline entails the following:
   a private cost of $2.83;
   a social cost of $3.12;
   a value to consumers of $3.23.
-Refer to Scenario 10-1. Suppose the dollar amount of the externality, per gallon of gasoline, is constant, regardless of how much gasoline is produced. Then the externality could be internalized if producers of gasoline were
A)provided a subsidy of $0.11 per gallon of gasoline sold.
B)provided a subsidy of $0.29 per gallon of gasoline sold.
C)required to pay a tax of $0.29 per gallon of gasoline sold.
D)required to pay a tax of $0.11 per gallon of gasoline sold.

Quizplus · Accepted Answer

The externality can be internalized by requiring producers to pay a tax equal to the difference between the social cost and the private cost, which is $3.12 - $2.83 = $0.29 per gallon.

Scenario 10-1 The Demand Curve for Gasoline Slopes Downward and the Supply