Question

In: Economics

Suppose you work as an economic advisor to the President, who wants to levy a $1.00...

Suppose you work as an economic advisor to the President, who wants to levy a $1.00 tax on the sale of gasoline (with the tax obligation on the seller) in an effort to control climate change. Two lobbyists are in the room with you, one for the oil industry, the other from a consumer advocacy group. The oil industry lobbyist says that putting the tax on SELLERS means they will bear the burden. The consumer advocate says that it’s actually the customers who will be hurt more by the tax. Suppose the equilibrium price is $2 per gallon and equilibrium quantity is 50 million gallons.

Who is right? Why? Show in a graph.

Solutions

Expert Solution

For a commodity that has unitary elastic, buyers and sellers bear an equal burden of tax. For inelastic demand or elastic supply, the buyers are likely to bear a greater burden of tax while sellers face a greater burden of tax in case of elastic demand or inelastic supply

As far as gasoline is concerned, the demand is relatively inelastic in the short run perhaps because of lack of substitutes and time for adjustment and adaptation to other modes of transport. Due to this reason when a tax is imposed on either side of the market, that is, on consumers or on sellers, it will be the buyers who will end up bearing a greater tax burden.

In this manner, oil industry lobbyist is wrong by saying that putting the tax on SELLERS means they will bear the burden. It actually does not matter on whom the gasoline tax is imposed, because inelastic demand of gasoline will harm consumers more than sellers.


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