Answered: Most U.S. states impose gasoline taxes…

Most U.S. states impose gasoline taxes as a way to collect revenue. Assume that there are no market failures in this market. Show how a gasoline tax will create deadweight loss and reduce efficiency.

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter10: Externalities

Section: Chapter Questions

Problem 3CQQ

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Concept explainers

Market Failure Analysis

To understand Market failure, we need to first understand welfare economics. An Italian economist, Vilfredo Pareto stated that allocation of resources in an efficient manner such that an economic change, which harms no one and makes someone better off, indicates an increase in social welfare. It is also called Pareto Optimality, where resources cannot further be reallocated without harming one. This does not apply to those economic changes, which harm some and benefit others. social welfare increases if the utility of any of its members' increases and none decrease in the economy.

Question

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1a) Most U.S. states impose gasoline taxes as a way to collect revenue. Assume that there are no market failures in this market. Show how a gasoline tax will create deadweight loss and reduce efficiency.

b) Now suppose that gasoline consumption entails a negative externality through greenhouse gas emissions. Show how a properly designed gasoline tax could improve efficiency given this externality.

c) What would you need to know to determine the efficient size of a state’s gasoline tax?

d) True or False? If a state’s gasoline tax is higher than the amount needed to restore efficiency, it is clear evidence of a policy failure.

Definition Definition Cost to society created by market inefficiency when supply and demand are not in market equilibrium.

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