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The local gasoline market in a particular city has demand and supply curves given by the following data. (All quantities are in millions of gallons per month.)

Price per gallon

\$1.00

\$1.50

\$2.00

\$2.50

\$3.00

\$3.50

\$4.00

Quantity demanded

6

5

4

3

2

1

0

Quantity supplied

0

1

2

3

4

5

6

1. Plot the demand and supply curves, and determine the equilibrium price and quantity.
2. Show the areas of consumer and producer surplus.
3. Now suppose that the community determines that each gallon of gasoline consumed imposes \$0.50 in pollution costs. Accordingly, a \$0.50-per-gallon tax is imposed. The tax is imposed on sellers of gasoline, and it has the effect of increasing by \$0.50 the price required to induce the quantities supplied in the table. For example, a price of \$2.00 is now required for a quantity of 1 million gallons to be supplied each month. Plot the new supply curve.
4. Approximate the new equilibrium price and output.
5. Does the price increase by the full amount of the tax? If not, explain why.
6. Would your answer be different if the demand for gasoline were perfectly inelastic?

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