Question

In: Economics

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

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

Solutions

Expert Solution

a) A tax of 18.3 percent per gallon of gasoline sold is the Specific tax. Specific tax is the tax imposed per unit of good sold regardless of the price level.

b) The immediate impact of specific is the increase in the price of the gasoline and the quantity of gasoline sold in the market will decrease as pre tax level. The supply curve of gasoline shift leftward and quality demanded decreases. See the attached image, where the supply curve shifts from S1 to S2 and price increases from P1 to P2 an quantity sold has decreased from Q1 to Q2.

c) the specific tax has increased the price of gasoline from P1 to P2 but it's less than the tax (P0 - P2). This is due to the sharing of tax burden, the specific tax leads to fall in demand for the gasoline so that the whole tax can not be shifted on the consumer. The burden of tax has been shared between consumer (P1 to P2) and seller (P0 to P1).

d) Yes taxing gasoline has leads to significant decrease in the amount of quantity sold from Q1 to Q2. A specific tax leads to increase the price and decrease in quantity demanded and higher burden on consumer so that the quantity sold significantly decreases.

Rahul Sunny answered 1 year ago
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