In the US, the federal government charges a tax of 18.3 cents per gallon of gasoline...

In the US, the federal government charges a tax of 18.3 cents per gallon of gasoline sold.

What type of tax is this?
Explain what effect this tax will have on the market for gasoline. Illustrate your answer with a diagram.
Explain why this tax will cause the price of gasoline to rise, but by less than 18.3 cents per gallon.
Is taxing gasoline likely to cause a significant decrease in the amount of gasoline sold? Explain

Solutions

Expert Solution

Consider the image below for a the diagram and detailed solution to the question. The given tax is a per-unit or Pigouvian tax. By implementing it, the supply curve in the gasoline market shifts leftward, increasing prices and reducing quantity sold. The price rises by less than $18.3, because part of the burden of the tax is paid by the producers themselves. Taxing gasoline is not likely to cause a significant decrease in amount sold, since the demand for gasoline is inelastic, i.e. it has a steeper demand curve. A shift in the supply curve causes only a small shift in the quantity sold.

Rahul Sunny answered 1 year ago

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