Microeconomics Patrice De Micco

Externalities

True/False/Uncertain?

1) Demand for gasoline is 𝑃 = 24 − 2𝑄 while supply is 𝑃 = 4𝑄. The production of 𝑄 units of gasoline
generates an external cost (negative externality) equal to 𝐸𝐶(𝑄) = 𝑄 2 . The marginal external cost curve is
therefore 𝑀𝐸𝐶(𝑄) = 2𝑄. If the government introduces a tax on gasoline equal to 8 euros per unit, then the
equilibrium quantity will be the socially efficient quantity.

2) The market demand for gasoline is 𝑄 = 15 – 𝑃, while the market supply is 𝑄 = 2𝑃. Each unit of gasoline
generates a negative externality equal to 3. Then the equilibrium quantity is 𝑄 = 10 while the socially
efficient quantity is 𝑄 = 8.

3) Demand for gasoline is 𝑃 = 210 − 𝑄 while supply is 𝑃 = 𝑄/2. The production of 𝑄 units of gasoline
generates an external cost (negative externality) equal to 𝐸𝐶(𝑄) = 𝑄 2 / 8. If the government introduces a
tax on gasoline equal to 30 euros per unit, then, the equilibrium quantity will be the socially efficient quantity.

4) Demand for plastic bags is 𝑃 = 60 − 𝑄 while supply is 𝑃 = 2𝑄. The production of 𝑄 plastic bags generates
an external cost (negative externality). The marginal external cost function is 𝑀𝐸𝐶(𝑄) = 𝑄. If the
government introduces a tax on plastic bags equal to 20 per unit, then the equilibrium quantity will be the
socially efficient quantity

5) Demand for plastic bags is 𝑃 = 30 − 𝑄/30 while supply is 𝑃 = 𝑄/30. The production of 𝑄 plastic bags
generates an external cost (negative externality). The marginal external cost function is 𝑀𝐸𝐶(𝑄) = 𝑄/30.
If the government introduces a tax on plastic bags equal to 9 euros per unit, then the equilibrium quantity
will be the socially efficient quantity.
Microeconomics Patrice De Micco

Externalities

True/False/Uncertain?

1) Demand for gasoline is 𝑃 = 24 − 2𝑄 while supply is 𝑃 = 4𝑄. The production of 𝑄 units of gasoline
generates an external cost (negative externality) equal to 𝐸𝐶(𝑄) = 𝑄 2 . The marginal external cost curve is
therefore 𝑀𝐸𝐶(𝑄) = 2𝑄. If the government introduces a tax on gasoline equal to 8 euros per unit, then the
equilibrium quantity will be the socially efficient quantity.
False. The marginal social cost is 4𝑄 + 2𝑄 = 6𝑄 and, hence, social efficiency is achieved when 24 − 2𝑄 =
6𝑄, or 𝑄 = 3; at 𝑄 = 3, the 𝑀𝐸𝐶 is equal to 6. The tax will restore the socially efficient level of output if it is
Pigouvian, hence if 𝑡 = 𝑀𝐸𝐶. The Pigouvian tax is, therefore, 𝑡 = 6.

2) The market demand for gasoline is 𝑄 = 15 – 𝑃, while the market supply is 𝑄 = 2𝑃. Each unit of gasoline
generates a negative externality equal to 3. Then the equilibrium quantity is 𝑄 = 10 while the socially
efficient quantity is 𝑄 = 8.
True. Setting demand and supply equal, we obtain 𝑄 = 10. Since 𝑃 = 𝑄/2, the social marginal cost is 𝑄/2 +
3. By equating the latter to the inverse demand function, 𝑃 = 15 − 𝑄, we obtain 𝑄 = 8.

3) Demand for gasoline is 𝑃 = 210 − 𝑄 while supply is 𝑃 = 𝑄/2. The production of 𝑄 units of gasoline
generates an external cost (negative externality) equal to 𝐸𝐶(𝑄) = 𝑄 2 / 8. If the government introduces a
tax on gasoline equal to 30 euros per unit, then, the equilibrium quantity will be the socially efficient quantity.
True. The marginal external cost curve is 𝑀𝐸𝐶(𝑄) = 𝑄/ 4. The social marginal cost is 𝑄/2 + 𝑄/4 = 3𝑄/4
and, hence, social efficiency is achieved when 210 − 𝑄 = 3𝑄/4, or 𝑄 = 120. Assuming that the tax is paid
by the producer (if it is paid by the consumer the conclusions are identical), the supply function is 𝑃 = 𝑄/2 +
30. Equating this to the demand function gives 𝑄 = 120.

or

True. The marginal external cost curve is 𝑀𝐸𝐶(𝑄) = 𝑄/ 4. The social marginal cost is 𝑄/2 + 𝑄/4 = 3𝑄/4
and, hence, social efficiency is achieved when 210 − 𝑄 = 3𝑄/4, or 𝑄 = 120. We assume that the tax is paid
by the producer (if it is paid by the consumer the conclusions are identical). The tax will restore the socially
120
efficient level of output if it is Pigouvian, hence if 𝑡 = 𝑀𝐸𝐶. The Pigouvian tax is, therefore, 𝑡 = = 30.
4

4) Demand for plastic bags is 𝑃 = 60 − 𝑄 while supply is 𝑃 = 2𝑄. The production of 𝑄 plastic bags generates
an external cost (negative externality). The marginal external cost function is 𝑀𝐸𝐶(𝑄) = 𝑄. If the
government introduces a tax on plastic bags equal to 20 per unit, then the equilibrium quantity will be the
socially efficient quantity.
False. The social marginal cost is 2Q+Q=3Q and hence social efficiency is achieved when 60-Q=3Q, or Q=15,
and at Q=15 the MEC is equal to 15, not 20.

5) Demand for plastic bags is 𝑃 = 30 − 𝑄/30 while supply is 𝑃 = 𝑄/30. The production of 𝑄 plastic bags
generates an external cost (negative externality). The marginal external cost function is 𝑀𝐸𝐶(𝑄) = 𝑄/30.
If the government introduces a tax on plastic bags equal to 9 euros per unit, then the equilibrium quantity
will be the socially efficient quantity.
False. The social marginal cost is Q/30+Q/30=Q/15 and hence social efficiency is achieved when 30-
Q/30=Q/15, or Q=300, and at Q=300 the MEC is equal to 10, not 9.