Question

7. Problems and Applications Q7 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. Suppose they decided to impose the tax on producers. In the following graph, shows the effect of a $0.50 tax on each gallon of gasoline sold imposed on producers by shifting the demand or supply curve. Supply Demand Supply Price of Gasoline (Dollars per gallon) emand 0 0 Quantity of Gasoline (Thousands of gallons)

Answer 1

Ans) When government imposes tax on sellers/producers, supply curve shifts to the left by the amount of tax.

Tax increases the price paid by consumers and reduces the price received by sellers. That is, it hurts both buyers and sellers.

It does not really matter upon whom the tax is imposed. Burden of tax is shared by both buyers and sellers. Now who will bear greater burden of tax depends upon the elasticity of demand and supply. Accordingly, less elastic side of the market bears greater burden of tax.

If demand is less elastic, tax fails reduce the quantity significantly. But if demand is elastic, quantity reduced is more.

Further, tax lowers the wages and causes unemployment. That is, it hurts workers.

7. Problems and Applications Q7 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. Suppose they decided to impose the tax on producers. In the following graph, shows the effect of a $0.50 tax on each gallon of gasoline sold imposed on producers by shifting the demand or supply curve. -o- Supply Demand Supply Price of Gasoline (Dollars per gallon) emand 0 0 Quantity of Gasoline (Thousands of gallons)

True or False: The effect of the tax will be the same regardless of whom the tax is imposed on. True O False more If the demand for gasoline were more elastic, this tax would be effective in reducing the quantity of gasoline consumed. True or False: Consumers of gasoline are hurt by this tax. True O False Workers in the oil industry are lui by this tax. TEL