Even when there are no externalities in a market, a government may still tax a good...

Even when there are no externalities in a market, a government may still tax a good such as petrol to earn revenue. Describe what happens to each of the surpluses (including total surplus) in the market for petrol when this occurs, and why.

What elasticity is the market for petrol likely to exhibit? Explain how elasticity influences the impact of the price change on total surplus.

Solutions

Expert Solution

The condition where there are no externalities, the government implement tax on petrol. The surplus for petroleum increased. At this time, the private participation in petroleum market increased. Thus the production and supply increased. Some scientist explained that positive externalities are good for the economy. Without the influence or participation of a third party in the market can increase the welfare and total surplus value in the economy. Petrol considered s a necessary good. Government provide grants and subsidies to the petroleum producers to reduce the cost and production and also encourage the level of supply.
Demand for petrol is perfectly inelastic in nature; the price having little influence on demand. The consumers are very sensitive towards the changes in price. The short run price elasticity of demand decrease in absolute value. If the prices are more volatile, the responsiveness of the consumer is less. If the consumer recognizes the volatility of price of petrol they will shift their behaviour to change the petrol price.

Rahul Sunny answered 1 month ago

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