Question

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

Refining, distributing, and selling of gasoline all take place within this European country.
1. In euros, what is the private cost for an individual of a liter of gasoline in Europe (Ex: If your answer is 3.25 Euros then enter 3.25)?
2. What is the social cost, in euros, of a liter of gasoline?

Cost Euros
Cost of imported oil................................................ 0.5
Cost of refining oil to gasoline............................... 1
Cost of distributing and selling gasoline............... 0.75
Government tax....................................................... 2.5
Cost of pollution from one liter of gasoline........... 2

Answer 1

1. 4.75

2. 4.25

Step-by-step 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