Question

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During the spring and summer of 2008 when gasoline prices were rising​ quickly, politicians in several countries proposed a moratorium on some or all gasoline taxes to help consumers. In the United​ States, John​ McCain, the Republican candidate for​ President, proposed suspending the federal gasoline tax of 18.4cents for the summer when demand tends to be higher. Hillary​ Clinton, while an active candidate for the Democratic nomination for the​ President, also pushed this plan. In the United​ Kingdom, Prime Minister John Major proposed delaying a 2p rise in a fuel tax until the fall. How would these​ short-run policies have affected the prices consumers pay in these countries if the policies had been​ enacted? Temporarily suspending or delaying fuel taxes that consumers pay would A. not lower fuel prices because fuel supply is horizontal in the short run. B. not lower fuel prices because fuel supply is only horizontal in the long run. C. shift the demand curve up by an amount equal to the size of the suspended tax. D. shift the demand curve down by an amount equal to the size of the suspended tax. Click to select your answer and then click Check Answer. All parts showing

Answer 1

Suspension or delay in the taxes on gasoline when the price of gasoline in the market is high will prevent the prices of gasoline in the market to be increasing further and leading to shortage of gasoline. This will prevent increase in price of gasoline further and decline in consumer surplus purchasing gasoline. Thus, most of the government do not impose taxes when the price of product is rising to prevent shortage of product and black marketing in the product market.

Temporarily suspending or delaying fuel taxes that consumers pay would shift the demand curve down up an amount equal to the size of the suspended tax (Option C). The demand curve will shift to right or upwards by the amount of the suspended tax with suspension or delay in the taxes that consumers pay.