Question

The government has imposed a 50 cents gas tax in New York on NY gas stations. Many of the residents are going to the nearby states to get gas instead. Construct a Supply and Demand graph showing the impact of the 50 cents gas tax increase in New York &the shift of some NY residents to the gas stations in nearby states.

1a) Show any shifts in the demand and/or supply curves and the resulting equilibrium Price and Quantity. Explain this situation.

1b) What can you clearly say about the effect of the two situations in 1b (increase in gas tax and residents buying gasoline from nearby states) on equilibrium quantity and the equilibrium price of gasoline purchased in NY? Explain clearly.

Answer 1

The gas tax will decrease supply of gas, shifting the supply curve leftward, increasing price and decreasing quantity. Residents purchasing gas from other states will decrease the demand from has in NY, shifting the demand curve leftward, decreasing price and decreasing quantity. The net effect is a definite decrease in quantity. But price may increase, decrease or remain unchanged as shown in following three possibilities.

In each graph, D0 and S0 are initial demand and supply curves intersecting at point A with initial price P0 and quantity Q0.

(1) Leftward shift in demand is more than the leftward shift in supply: Price decreases

In following graph, D0 shifts left to D1 and S0 shifts left to S1, intersecting at point B with lower price P1 and lower quantity Q1.

(2) Leftward shift in demand is less than the leftward shift in supply: Price increases

In following graph, D0 shifts left to D1 and S0 shifts left to S1, intersecting at point B with higher price P1 and lower quantity Q1.

(3) Leftward shift in demand is equal to the leftward shift in supply: Price unchanged

In following graph, D0 shifts left to D1 and S0 shifts left to S1, intersecting at point B with same price P1 and lower quantity Q1.