Question

After watching the Section 5.3 Review and Section 6.2 Review videos, respond to the questions below.

Gas prices fluctuate often and in both directions. In your initial post, respond to the following:

• How responsive do you think consumers will be to the price change when these fluctuations occur due to changes in supply? Why? Use the various determinants of elasticity to explain your answer.
• How does the price elasticity of demand for gasoline impact the effectiveness of taxes on gasoline aimed at correcting a negative externality?

Consider incorporating the supply-and-demand model to demonstrate the elasticity of demand for gas and to show the effects of tax on the market for gas.

Answer 1

Answer:

It does not matter whether the tax is imposed on producers or consumers, this is because the effect will be the same. Since with no tax, as shown in the diagram, the demand curve is D1 and the supply curve is S1. Then if the tax is imposed on producers, the supply curve shift to S2 by the amount of tax which is suppose $0.50. Then equilibrium quantity is Q2, the price paid by the consumers is P2, and the price received by seller is P3. If the tax imposed on consumers, the demand curve shift to D2 by amount of $0.50. The downward shift of demand curve is exactly the same magnitude as the upward shift in supply curve when tax is imposed on producers. So again, the equilibrium is Q2, the price paid by consumers is P2 and the price received by producers is P3. Note the supply-and-demand diagram:

Price of Gasoline S2 S1 195 P3 D1 Quantity of Gasoline Q2 Q1

Now the more elastic the demand curve, the more effective the tax reducing the quantity of gasoline consumed. Greater elasticity mean that quantity fall more than the rise in the price of gasoline. The diagram show the result.

Price of Gasoline tax 01 Quantity of Gasoline D2