Figure 4-25
Figure 4-25 illustrates the market for gasoline before the government imposes a tax to bring about the efficient level of gasoline production.
-Refer to Figure 4-25.If the government wanted to bring about the efficient level of gasoline production by imposing a tax,the tax would raise the price paid by consumers by ________ per gallon.

Question

Figure 4-25
  Figure 4-25 illustrates the market for gasoline before the government imposes a tax to bring about the efficient level of gasoline production.
-Refer to Figure 4-25.If the government wanted to bring about the efficient level of gasoline production by imposing a tax,the tax would raise the price paid by consumers by ________ per gallon.

Quizplus · Accepted Answer

The efficient quantity of gasoline is where the marginal social cost (MSC) intersects with the demand curve (D), which is at a quantity of 9 gallons and a price of $2.75 per gallon. The current quantity produced and consumed is 11 gallons and the price is $3 per gallon, which is above the efficient price. To bring about the efficient level of production, a tax must be imposed so that the marginal private cost (MPC) includes the external cost of pollution. A tax of $0.50 per gallon (the vertical distance between the MSC and the MPC curves at Q = 11) would shift the MPC curve up to match the MSC curve at Q = 9. This would raise the price paid by consumers by $1.25 per gallon (the difference between the new MPC curve and the demand curve at Q = 9). Therefore, the best answer is B) $1.25.

Figure 4-25 Figure 4-25 Illustrates the Market for Gasoline Before