Problem
Market for gasoline in Dane County, Wisconsin is given by the following equations: PMC = 4 + 0.01 Q PMB = 10 - 0.005 Q Where units of quantity (Q) and price (P) are in Thousands of Gallons and $/gallon respectively.
In addition, production of gasoline generates externality such that the Social Marginal Cost is given by: SMC = 4 + 0.02 Q Based on the above information answer the following questions:
A. Determine the market price and quantity of gasoline produced if the market for gasoline is competitive. (i.e, without considering externalities).
B. Determine socially efficient price and quantity of gasoline in this market.
C. Which instrument- taxes or subsidies, will be appropriate in order to internalize the externality in this market?
D. Compute total government's revenue/ expenditure in using the above appropriate instrument.
E. Graphically show all the points including the area represented by deadweight loss when externalities were not internalized.