The net gain if the government fixes the price above the optimal level. Concept Introduction: The positive or negative consequences faced by an unrelated third party or parties due to the performance or undertaking of an economic activity are known as externalities. The cost of economic activity incurred by a third party or parties is known as negative externalities.

Question

5) Suppose: i) the price of gasoline is $2 per gallon ii) current consumption is 400 (million) gallons per day iii) the elasticity of demand is -0.8 iv) retail provision of gasoline may be approximated as a constant cost industry v) there is an external cost of $0.5 per gallon of gas. Calculate deadweight loss associated with the externality. Draw a figure to illustrate.

Answer 1

Question

Chapter 17, Problem 4P

To determine

The net gain if the government fixes the price above the optimal level.

Concept Introduction:

The positive or negative consequences faced by an unrelated third party or parties due to the performance or undertaking of an economic activity are known as externalities. The cost of economic activity incurred by a third party or parties is known as negative externalities.

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5) Suppose: i) the price of gasoline is $2 per gallon ii) current consumption is 400 (million) gallons per day iii) the elasticity of demand is -0.8 iv) retail provision of gasoline may be approximated as a constant cost industry v) there is an external cost of $0.5 per gallon of gas. Calculate deadweight loss associated with the externality. Draw a figure to illustrate.

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