The gasoline market can be represented by these functions: QS = 50P & QD = 120 – 30P
a) What is the equilibrium price and quantity in the market?
b) If gas stations are required to pay a tax of $0.50/gallon, what is the new equilibrium price and quantity? How much will stations receive and how much will consumers pay?
c) Instead, if consumers have to purchase government coupons for $0.50/gallon before buying gas, what is the new equilibrium price and quantity? How much will stations receive and how much will consumers pay? How does this compare with (b)?
d) What are the levels of consumer and producer surplus before (a) and after taxes (b), (c)?
e) If burning gasoline causes pollution costing $1/gallon, what is the optimal level (price & quantity) of gasoline consumption, taking this externality into account?
f) Describe three policies which would achieve the optimal level of consumption, and find the levels of consumer surplus, producer surplus, government revenue (if any) and total social surplus associated with each policy.
g) “If there is an externality, there is a unique efficient level of production, but there is no unique efficient price.” What is “efficiency” in this context? Is this statement correct?
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