Question

Suppose that the Congress and the president decide that the United States should reduce air pollution by reducing its use of gasoline. They impose a $0.50 tax for each gallon of gasoline sold. a. Should they impose this tax on producers or consumers? Explain by using a supply and demand diagram. (5 pts) b. If the demand for gasoline were more elastic, would this tax be more or less effective in reducing the quantity of gasoline consumed? Explain with both words and a diagram. (5 pts) c. Are consumers of gasoline helped or hurt by this tax? Why? (5 pts) d. Are workers in the oil industry helped or hurt by this tax? (5 pts)

Answer 1

a Chow united states should reduce air pollution by reducing its use of gasoline. They impose a 0.50 tax each gallon of gasoline sold. should they impose this Tax on producers or consumers? Explain by using a supply & demand diagram? supplier or Doesn't matter whether you tay on the @ quantity coin decrease. Because Consumer. Eitherway the elasticities are the same here the effect as same with notax. the tax The Demand Curve (Di, supply curte(s). The Tax is imposed on producers. The supply curse shifts upward the impose a 0.50 cents. tos). Then the equilbrium quantity becomes 9. The price paid by Consumers is P₂ and the price received by producers P2 - (50 cents) The Demand Curve shifte down word by the impose a Tax of (0.50 cents to consumers. again the equibrium quantity become as The price paid by the consumers is P2 (Tax paid to government) and here the price Received by producers is (P2-50) price of gasoline. Cot O2 gasoline. (Quantity of

5 The demand curve become more elastic then there will be Large decrease in quantity when a tax is imposed. elasticity of demand is the quantity falls the more in than the price. D is clactic demand curve, and Ds is more lastig inelastic. The Tax Causes the more decline in quanting sold when the demand is elastic. -supply Price of gasoline D DI I by gasoline quantity of The Consumers of gasoline are hurt by the Tax because they gets the less gassoline at a high price. (). - Workers in the oil industry are hurt by Tax. Because The lower quantity of gasoline is produced, so some worker may lose their jobs with the lower price received by producers. The impact of wages of workers may decline .