A new chain of garages specializing in quick (under 5 minutes) oil-changes for automobiles has opened in the
county. It charges $25 per oil change and currently sells 10,000 oil changes per year. It appears that the marginal cost of the firm is approximately $25 per oil change and independent of the number of changes sold. Unfortunately, the chain uses a process that results in considerable leakage of hydrocarbon emissions into the air. No state or federal regulations prevent these emissions, and the county does not have direct regulatory authority. It can, however, impose a tax on oil changes using this process. An analysis presented by an expert panel indicates that the social cost of the emissions is $10 per oil change. Economists have estimated that the price elasticity of demand for the quick oil changes is -.5 at the current price and quantity assuming a linear demand schedule.
a. Illustrate the market in a fully labeled graph.
b. Imagine that the county imposes a $10 tax per oil change on the chain. Calculate the annual net benefits of this tax.
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