Suppose that, in order to incentivize drivers to switch to electric vehicles, a government imposes a tax to be added to the purchase price of gasoline cars and a subsidy (discount voucher) on the purchase of electric cars. You can assume whatever you think is reasonable about the demand and supply elasticities to prices. Illustrate the likely effects of those policies using graphs. Discuss: What happens to the quantity of gasoline and electric cars in equilibrium? Who bears the burden of the tax, and who enjoys the subsidy in your model (between producers and consumers)? As a policymaker, do you want demand and supply curves to be more or less price elastic for the policy to work?
Suppose that, in order to incentivize drivers to switch to electric vehicles, a government imposes a tax to be added to the purchase price of gasoline cars and a subsidy (discount voucher) on the purchase of electric cars. You can assume whatever you think is reasonable about the demand and supply elasticities to prices. Illustrate the likely effects of those policies using graphs. Discuss: What happens to the quantity of gasoline and electric cars in equilibrium? Who bears the burden of the tax, and who enjoys the subsidy in your model (between producers and consumers)? As a policymaker, do you want demand and supply curves to be more or less price elastic for the policy to work?
Chapter6: Elasticities
Section: Chapter Questions
Problem 16P
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Question
Taxes & Subsidies
Suppose that, in order to incentivize drivers to switch to electric vehicles, a government imposes a tax to be added to the purchase price of gasoline cars and a subsidy (discount voucher) on the purchase of electric cars. You can assume whatever you think is reasonable about the demand and supply elasticities to prices.
Illustrate the likely effects of those policies using graphs. Discuss:
-
What happens to the quantity of gasoline and electric cars in equilibrium?
-
Who bears the burden of the tax, and who enjoys the subsidy in your model (between producers and consumers)?
-
As a policymaker, do you want demand and supply
curves to be more or less price elastic for the policy to work?
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