Question

Who Pays Higher Gasoline Taxes?

Gasoline taxes are paid by sellers from the revenues they earn from their total sales. Thus to receive the same effective price for selling a given quantity of gasoline, a gasoline producer must charge an actual price that is higher by exactly the amount of the tax. Sellers supply a given quantity of gasoline, but at a price that is higher by the amount of the tax that they have to pay to the government.

Who truly pays the tax depends on the price elasticity of demand. The more inelastic is demand, the greater is the portion of the tax paid by consumers. Thus if the demand for gasoline was perfectly inelastic, the entire burden of the tax would fall on buyers. If demand was perfectly elastic, the entire burden would fall on sellers. Estimates of the price elasticity of demand for gasoline indicate values between 0.2 and 0.5. Based on the information in this example, if excise taxes increased by 10 percent, by what percentages may desired gasoline purchases decrease?

Answer 1

As the information is given that sellers have to increase the price by the amount of tax. so a 10%tax will lead to a 10% increase in price.

price elasticity of demand of gasoline = % decrease in quanity demanded of gasoline/ % increase in price of gasoline.

since, elasticity is between 0.2 to 0.5 we have the lower and upper limits.

after applying the formula to determine the % fall in demand of gasoline, we find that the % fall in demand of gasoline stays between 2% to 5% and can take any value in between them including the upper and lower limits.

WHO PAYS HIGHER GASOLINE TAXES?

as it is evident from the price elasticity of demand being between 0.2 to 0.5 , it is highly inelastic demand meaning that even with rise in prices people will continue to consume gasoline. so the higher proportion of burden of tax falls on the consumers or buyers of gasoline and very less on the sellers.