Problem
The following table shows the demand in a local market for gasoline.
For simplicity, suppose gas can be supplied at a constant marginal cost of $2 in this market.
|
Price
|
Demand
|
|
$1
|
100,000
|
|
$2
|
80,000
|
|
$3
|
60,000
|
|
$4
|
50,000
|
|
$5
|
40,000
|
|
$6
|
35,000
|
|
$7
|
30,000
|
A. If this is a free market, what will the equilibrium price and quantity be?
B. Suppose that driving gas-powered cars generates an external cost of $3 per gallon in terms of pollution, contribution to global warming, accidents involving pedestrians and bicyclists, and traffic. What is the efficient outcome for this market?
C. If the government decides to use a tax to eliminate this inefficiency, how big of a tax should they use?
D. Do you think this Pigouvian tax will be popular? Who will like it? Who will dislike it? Do you think it is politically feasible? Explain in detail.
E. Do you have another proposal to push society towards the efficient outcome in a way that will be more politically feasible?