Question

Assignment 5-Q2 (4 points) The government is going to impose a specific gasoline tax of ¥10 per liter. A commenter of KG Times discusses that the taxation will push up the gasoline price per liter by ¥10. Discuss briefly on this comment.

Please provide your calculations and explanations. ( No handwriting pls because it is difficult to read..)

Thank you in advance.

Answer 1

If a tax of $10 is imposed on gasoline by the government, such that price of gasoline increases by the amount of the tax i.e, $10, then it can be referred that the market is facing perfectly elastic supply of gasoline. When the tax is imposed, the supply curve shifts upwards and the equilibrium price rises by the amount of the tax.