Question

In: Economics

Suppose the government imposes a tax on gasoline. Would the revenue collected from this tax likely...

  1. Suppose the government imposes a tax on gasoline.
  1. Would the revenue collected from this tax likely be greater in the first year after it is imposed or in the fifth year? Explain using a graph.
  2. Would the deadweight loss from this tax be greater in the first year after it is imposed or in the fifth year? Explain using a graph.

Solutions

Expert Solution

a) In the 1st year demand is relatively inelastic. Hence when a tax is imposed on buyers, demand decreases and this shifts the demand down. Deadweight loss (shown by black shaded region) is small. In the fifth year the demand becomes elastic. Hence, the same tax now generates a lower deadweight loss.

b) In the 1st year demand is relatively inelastic. Hence when a tax is imposed on buyers, demand decreases and this shifts the demand down. Revenue (shown by green shaded region) is large in first year. In the fifth year the demand becomes elastic. Hence, the same tax now generates a lower tax revenue.

Rahul Sunny answered 2 years ago
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