Algebraically solve for the efficient equilibrium price and quantity, PE and QE.
As an economic consultant to the federal government, you recommend a market-based national policy response to global warming. In particular, you suggest using a pollution charge, which can be implemented as a gasoline tax. Based on your estimates, the marginal benefits and costs per gallon of gasoline are modeled as follows:
MPB = 10 ? 0.7Q MEB = ? 0.05Q MSC = MPC = 1 + 0.15Q,
where Q is in millions of gallons.
To find the efficient solution, set MSB = MSC, where MSB = MPB + MEB = 10 – 0.7Q + (– 0.05Q) = 10 – 0.75Q.
MSB = MSC
10 – 0.75Q = 1 + 0.15Q
0.9Q = 9
?QE = 10 million gallons
Substituting into either MSB or MSC, PE = 10 – 0.75(10) or 1 + 0.15(10) = $2.50
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