Question

Demand and Supply for Gasoline

Price	Quantity Demanded (in gallons)	Quantity Supplied (in gallons)
1	3,000	120
2	2,800	160
3	2,600	200
4	2,400	240
5	2,200	280
6	2,000	320
7	1,800	360
8	1,600	400
9	1,400	440
10	1200	480
11	1000	520
12	800	560
13	600	600
14	400	640
15	200	680

1. Assume the market for gasoline is competitive: What is the market equilibrium price of gasoline?

2. If the government imposes a $6/gallon tax on gasoline collected from sellers. After the imposition of the tax, what will be the new market price?

3. If the government imposes a $6/gallon tax on gasoline collected from buyers. After the imposition of the tax, what will be the new market price?

4. Assume that the government imposes a $6/gallon tax on gasoline (on either consumers or producers). After the imposition of the tax, what is the incidence of the tax? Specifically what proportion of the tax falls on buyers?

5. Assume that the government imposes a $6/gallon tax on gasoline (on either consumers or producers). After the imposition of the tax, what is the incidence of the tax? Specifically what proportion of the tax falls on sellers?

6. If each gallon of gasoline imposes a $12 negative externality, and the market for gasoline is a competitive market: What is the efficient quantity of gasoline?

Answer 1

1. Assume the market for gasoline is competitive: the market equilibrium price of gasoline = $13.
   Demand = supply = 600 when price = $13.
2. If the government imposes a $6/gallon tax on gasoline collected from sellers. After the imposition of the tax, the new market price will be $14.
   Demand = supply = 400 when price is $14 for buyers and $8 for sellers. The difference between the two prices is the tax amount (14 - 8 = 6)
3. If the government imposes a $6/gallon tax on gasoline collected from buyers. After the imposition of the tax, the new market price will be $14.
   Demand = supply = 400 when price is $14 for buyers and $8 for sellers. The difference between the two prices is the tax amount (14 - 8 = 6). It does not make any difference on whom the tax is levied, the final result is the same.
4. Assume that the government imposes a $6/gallon tax on gasoline (on either consumers or producers). After the imposition of the tax,
   $1 is paid by buyers; $5 is borne by the sellers.
   16.67% of the tax is borne by the buyers. (1/6)*100 = 16.67%
5. Assume that the government imposes a $6/gallon tax on gasoline (on either consumers or producers). After the imposition of the tax, proportion of the tax falls on sellers = 83.33% of the tax falls on sellers. (5/6)*100 = 83.33%
6. If each gallon of gasoline imposes a $12 negative externality, and the market for gasoline is a competitive market: the efficient quantity of gasoline = 200
   Demand = supply = 200 when price for buyers is $15; and price for sellers = $3. The difference ($12) is the extent of negative externality.