Question

Consider the market for​ gasoline, illustrated in the figure to the right. Suppose the government adds a ​$1.50 per gallon excise tax on​ gasoline, which shifts the supply curve from S1 to S2 ​, as illustrated. What is tax incidence? Consumers pay ​$------- of the tax and producers pay ​$------ of the tax. ​(Enter your responses rounded to two decimal​ places.)

Question Help on 5.50 S2 5.00-1 4.50 4.00- G 3.50- 3.00 Price (dollars per gallon) 2.50 2.00 1.50 1.00 0.50 0.00 N 4 6 8 10 12 14 16 18 20 22 24 26 Quantity (billions of gallons)

Answer 1

Ans. After the imposition of a tax of $1.50, tax incidence is

The burden of tax on Consumers = Consumers paid after-tax - consumers paid before tax

= $2.50 - $2.00

= $0.50

Hence, the consumers pay $0.50 of tax.

The burden of tax on producers = producers received before tax - producers received after tax

= $2.00 - $1.00

= $1.00

Hence, the producers pay $1.00 of tax.