Scenario 10-1
The demand curve for gasoline slopes downward and the supply curve for gasoline slopes upward. The production of the 1,000 th gallon of gasoline entails the following:
• a private cost of $3.10;
• a social cost of $3.55;
• a value to consumers of $3.70.
-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 $0.30 per gallon of gasoline sold.
B)provided a subsidy of $0.45 per gallon of gasoline sold.
C)required to pay a tax of $0.45 per gallon of gasoline sold.
D)required to pay a tax of $0.30 per gallon of gasoline sold.

Question

Quizplus · Accepted Answer

To internalize the externality, producers of gasoline should be required to pay a tax equal to the difference between the social cost and private cost, which is $0.45 per gallon ($3.55 - $3.10). This tax would incentivize producers to take into account the negative externalities imposed on society and reduce their output, leading to a more efficient allocation of resources. Subsidies, on the other hand, would encourage overproduction and exacerbate the externality problem.

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