Question

In Petroleum Products: Government is known to utilize a product's elasticity measures to set taxes and subsidies. Use this information to set policy on petroleum products according to your goal. Research the government's tax/subsidy policy in these areas and any objectives of the tax policy. State your goal, your prescribed action, and why you believe it will work using the information you found.

Answer 1

Petroleum products are generally subsidized by the government. In some countries, government provides fuel subsidy which is as high as 20 % of budget expenditure.

Usually, demand for petroleum product is relatively inelastic. Hence, by imposing tax on petroleum products would not reduce its quantity demanded substantially. But government can garner sufficient revenue in forms of taxes to fund other projects such as educational and environmental.

Purpose of taxing petroleum products should be to reduce its demand and collected revenue be used to fund environmental products. Since demand for petroleum product is relatively inelastic, hence its misuse can be curtailed by taxing it. Taxing petroleum would infuse efficiency in its use.

It would affect rich and poor simultaneously. Since petroleum product has both direct as well indirect impacts on whole economy. Hence, for avoiding negative impacts, some sphere can be subsidized so that it does not affect output level adversely.