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Consider a modern city where firms are located in the central business district or along a circumferential highway. Congestion is not a problem; everyone travels at the legal speed limit. Suppose that in an attempt to internalize the pollution externalities from auto use, the city imposes a $2 per gallon tax on gasoline. Assume that (i) everyone continues to drive himself or herself to work and (ii) the tax does not affect the spatial distribution of residences. Will the gas tax increase, decrease, or not affect the fraction of employment in the central business district?

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Operation Management, Management Studies

Category:- Operation Management
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