Question

Government is known to utilize a product's elasticity measures to set taxes and subsidies. Use this information to set policy on petroleum products(Gasoline) 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. (How to make gasoline tax that would be fair nationwide.)

Answer 1

Answer:-

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.

It has been stated that receipts from gasoline taxes are used to build and maintain highways and since these taxes are used to build highways, these taxes are fair as they make the users of roads to pay for them.

However, it should be noted that gasoline taxes are not imposed in particular manner but in general manner. In other words, whoever buys the gasoline, pays the tax.

Thus, whether one uses the highways build and maintained through gasoline taxes or not, he has to pay the tax if he purchases the gasoline.

So, to say that only those who are using the road bear the burden of gasoline tax is a wrong assertion.

In reality, it is the each and every buyer of gasoline that bears the burden of gasoline tax whether he or she uses the roads built by receipts of gasoline taxes or not.