What is the economically efficient price

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Reference no: EM13179368

Assume the marginal external cost ("MEC") of oil use is $23/bbl in 2013. Assume the MEC is linear and is equal to $0/bbl when there is no oil production. Finally assume the following regarding the oil industry in 2013. Assume the supply and demand curves are:

Qs = 79.2 + 0.0928*P

Qd=92.4-0.0464*P.

Answer the following (showing all work):

What is the economically efficient price and quantity of oil?

What is the cost to society of the economic inefficiency created by the external cost of oil?

What is the Pigouvian tax that will lead to the economically efficient quantity of oil being produced/consumed? (Hint: determine the MEC at the efficient quantity.)

What is the consumer surplus at the "competitive" equilibrium with no Pigouvian tax?

What is the consumer surplus after the Pigouvian tax is imposed?
Do consumers of oil like the outcome with the Pigouvian tax? What does this say about the political practicality of using Pigouvian taxes to correct negative externalities?

Reference no: EM13179368

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