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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

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 on each gallon of gasoline sold.

a. Should they impose this tax on producers or consumers? Explain carefully using a supply-and-demand diagram.

b. If the demand for gasoline were more elastic, would this tax be more effective or less effective in reducing the quantity of gasoline consumed? Explain with both words and a diagram.

c. Are consumers of gasoline helped or hurt by this tax? Why?

d. Are workers in the oil industry helped or hurt by this tax? Why?

Sub part (a):

To determine
The impact of tax on the gasoline to reduce air-pollution.

Explanation

When the tax is imposed in the market where the supply curves as well as the demand curve are elastic, the burden of tax will be shared among the buyers and sellers. Thus, under such conditions, imposing the tax on the buyers or the sellers of the gasoline would make no difference. The impact will be the same. When there is no tax on the gasoline, the price and the quantity will be determined at the point of intersection of the demand curve as well as the supply curve for gasoline. The tax imposition would lead to a shift in the supply curve upwards and the demand curve downwards. This can be explained with the help of the following diagram:

When there is no tax in the economy on the gasoline, the demand curve is D1 and the supply curve is S1...

Sub part (b):

To determine
The impact of tax on the gasoline to reduce air-pollution.

Sub part (c):

To determine
The impact of tax on the gasoline to reduce air-pollution.

Sub part (d):

To determine
The impact of tax on the gasoline to reduce air-pollution.

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