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Price Theory
Price Theory
Assignment 1 { Consumer Theory
Carbon dioxide (CO2) is emitted when drivers use petrol to power their cars. CO2 emis-
sions are a negative externality of petrol use, as they contribute to global warming. One
way to correct this market failure is to levy a corrective tax (also known as a Pigovian
tax) on petrol.
Suppose that Sally has an income of $300 per week. Sally's utility is given by the
function U(x; y) = pxy, where x is the quantity of petrol (measured in litres), and y is
the quantity of the composite good. The marg... More