Question

The table below shows some hypothetical data on the costs associated with the use of a liter of gasoline in a European country.

Answer 1

Answer:

1. 4.75

2. 4.25

Explanation:

1. Private cost is a supplier's or producer's cost of providing goods and services without any external cost.

Private cost:

= Cost of imported oil + Cost of refining oil to gasoline + Cost of distributing and selling gasoline + Government tax

= 0.50 + 1 + 0.75 + 2.50

= 4.75

2. Social cost is private cost plus external cost.

Social cost:

= Cost of imported oil + Cost of refining oil to gasoline + Cost of distributing and selling gasoline + Cost of pollution from one liter of gasoline

= 0.5 + 1 + 0.75 + 2

= 4.25