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Suppose the marginal benefits and costs per gallon of gasoline in the United States are modeled as follows to illustrate the negative externality of gasoline combustion:

MSB ¼12:80  0:42Q MPB¼ 12:80  0:4Q
MSC ¼ MPC ¼ 1:25 þ 0:02Q,
where Q is millions of gallons.

a. State the equation that represents the market externality. Give the economic interpretation of this equation, using its specific numerical value(s).

b. Find the efficient equilibrium, PE and QE, for this market. (Do not round off.)

c. Find the dollar value of a per-unit gasoline tax that would achieve the efficient solution, and find out the tax revenues generated to the government as a result.

Microeconomics, Economics

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