-In the figure above, S is the supply curve and D is the demand curve in the unregulated, competitive market for gasoline in Motorland. The external cost of gasoline is constant at $1.50 per gallon. Suppose Motorland's government imposes a tax of $1.50 per gallon of gasoline sold. With the tax, the market will
A) underproduce by 0.2 million gallons of gasoline a month.
B) underproduce by 0.1 million gallons of gasoline a month.
C) overproduce by 0.1 million gallons of gasoline a month.
D) produce the efficient quantity of gasoline.

Question

-In the figure above, S is the supply curve and D is the demand curve in the unregulated, competitive market for gasoline in Motorland. The external cost of gasoline is constant at $1.50 per gallon. Suppose Motorland's government imposes a tax of $1.50 per gallon of gasoline sold. With the tax, the market will
A) underproduce by 0.2 million gallons of gasoline a month. 
B) underproduce by 0.1 million gallons of gasoline a month. 
C) overproduce by 0.1 million gallons of gasoline a month. 
D) produce the efficient quantity of gasoline.

Quizplus · Accepted Answer

The tax of $1.50 per gallon internalizes the external cost, aligning private costs with social costs, leading to the efficient quantity being produced.

-In the Figure Above, S Is the Supply Curve and D