Question

The government lowers tax on Aviation fuel. What is the extent to which this benefit will be transferred by the industry to the airline consumer ? Explain using the price elasticity of demand and supply.

Answer 1

The government lowers the tax on airline fuel that causes decrease in the cost of operation, but its benefits transfer to the consumers, will depend upon the elasticity of demand and supply.

If demand for the aviation services is more elastic, then more of the benefits will be transferred to consumers to increase the sales of flight tickets. if demand for the aviation services, is more inelastic in nature, then benefits of lower cost of operation, will not be passed to the consumers. It is the reason that economy class consumers, being more elastic demand, get the benefit in terms of the lower price, but business class consumers will not get the benefit as their demand is price inelastic.

If supply is more elastic, it means that more aviation service providers will enter in the market with reduced cost of operation, then competition will increase and service providers will be forced to pass the benefits to the consumers. If not and service is inelastic in nature, then benefits will mostly be hold by the service providers.