Question

need an appropriate diagram for the answer. thanks

3. When the price of gasoline is $1.00 per litre, an average gasoline consumption of a BC resident is 2,000 litres per year. The BC government is considering imposing a carbon tax on gasoline. The government expects the price of gasoline to rise to $1.25 per litre. In order to offset this harm, the government gives each resident a cash transfer of $500 per year. Assuming that you consumed 2,000 litres per year, will you be better off or worse off with this taxation (i.e., the price increases by $0.25 and receive cash transfer of $500)? What will happen to your gasoline consumption? Explain your answer with the use of an appropriate diagram.

Answer 1

Total consumption= 2000 litres

Cost of gasoline before taxation= 2000*$1 = $2000

Cost of gasoline after taxation= 2000 * $1.25= $2500

Cash transfer per year= $500

Therefore, if 20000 litres of gasoline is consumed, the net effect of increase in price of the gasoline because of taxation gets cancelled out with cash transfer of $500 per year.

Diagram (ag As price of gasoline increases, the quantity demanded usile fall - because of increase a in taxation. Quantity of gasoline. Cash - transfer कडळ - - Diagram (6) As cash transfer of $500/year is made, the price Salls and hence the net effect of the . quantity demanded will be some if 2000 litres per year is consumed. Conclusion - Price increased by taxation gets cancelled out as $500 is given back as cash transfer. There fore, there is no change es san quantity demanded CamScanner

Change in consumption when 2000 litres of gasoline is consumed: NO CHANGE

Please, refer to the image attached for the diagram.