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Question: Gasoline Consumption & Externalities  Suppose the daily market for gasoline in California is comp...

Show transcribed image text Gasoline Consumption & Externalities Suppose the daily market for gasoline in California is competitive. The demand is given by P = 10 – 1/2Qd, while the supply is given by P = 2/5 + 1/10Qs. Price is measured in $/gallon. Quantity is measured in millions of gallons. a. Mathematically solve for the private market equilibrium quantity (Qm). b. Suppose consuming gasoline imposes an externality from air pollution and other environmental damage in that the amount ofs2 for each gallon consumed. Calculate the socially optimal gasoline production and consumption (Q*) and clearly state whether the market outcome found in part a leads to over-production and consumption or under-production and consumption of gasoline. c. Should the government use a tax or a subsidy to internalize this externality? Exactly how much should the tax or subsidy be in dollars per gallon? Briefly explain your answer.

Gasoline Consumption & Externalities Suppose the daily market for gasoline in California is competitive. The demand is given by P = 10 – 1/2Qd, while the supply is given by P = 2/5 + 1/10Qs. Price is measured in $/gallon. Quantity is measured in millions of gallons. a. Mathematically solve for the private market equilibrium quantity (Qm). b. Suppose consuming gasoline imposes an externality from air pollution and other environmental damage in that the amount ofs2 for each gallon consumed. Calculate the socially optimal gasoline production and consumption (Q*) and clearly state whether the market outcome found in part a leads to over-production and consumption or under-production and consumption of gasoline. c. Should the government use a tax or a subsidy to internalize this externality? Exactly how much should the tax or subsidy be in dollars per gallon? Briefly explain your answer.