Question

A gallon of gasoline emits about 19lbs of CO2 when burned. A $40/ton tax on CO₂ emissions would add about $0.38 to the price of a gallon of gasoline, about a 15% increase in current gasoline prices. In the near term, what would be the percent decrease in quantity demanded for gasoline given the short run elasticity of demand for gasoline is -0.33.

-3.3%

-5%

-15%

-45%

No change in the quantity of gasoline demanded. Gasoline is a perfectly inelastic good.

Answer 1

Elasticity = percentage change in demand/percentage change in price

percentage change in price = 15%

Elasticity = -0.33

so, -0.33 = Percentage change in demand/15

Percentage change in demand = 15*-0.33 = -4.95 or -5%

so, the percentage decrease in quantity = 5%

option(B)