1. The private cost of production includes the amount a firm pays for _______, _______, and_______.
2. The external cost of production is the cost incurred by _______.
3. The social cost of production equals the _______cost plus the _______cost.
4. A pollution tax will decrease the amount of pollution a firm generates if the tax exceeds the _______of abatement.
5. A pollution tax decreases the volume of pollution in two ways, by decreasing _______and decreasing_______.
6. The marginal damage from pollution varies with _______, so they are higher in _______areas than in _______areas.
7. Arrows up or down: A carbon tax will shift the supply curve for home heating oil _______, causing the equilibrium price to _______and the equilibrium quantity to _______.
8. The Market Effects of a Carbon Tax. Consider the market for gasoline. In the initial equilibrium, the price is $2.00 per gallon and the quantity is 100 million gallons. The price elasticity of demand is 0.70, and the price elasticity of supply is 1.0. Suppose a carbon tax shifts the supply curve upward by $0.34 and to the left by 17 percent.
a. Use a graph to show the effects of the tax on the equilibrium price and quantity of gasoline.
b. After reviewing the price-change formula in the earlier chapter on elasticity, compute the new price and quantity. The new price is $ _______per gallon and the new quantity is _______million gallons.
c. Consumers pay $_______ of the $0.34 tax and producers pay the remaining $_______ of the tax.
9. Shifting a Tax on Home Heating Oil. You are an economic consultant to a member of Congress. Someone just introduced a bill that would impose a carbon tax of $100 per ton, which would shift the supply curve for heating oil upward by $0.30 per gallon and to the left by 15 percent. The initial (pretax) price of heating oil is $2.00.
a. Use a graph to show the effects of the tax on the price and quantity of heating oil. Will the entire tax be paid by consumers? If not, who else will bear part of the tax?
b. Suppose the price elasticity of the supply of heating oil is 1.0 and the price elasticity of demand is 0.50. Use the price-change formula developed in the chapter on elasticity to predict the new equilibrium price. What fraction of the tax is passed forward to consumers?