Question

The government is considering an increase of the price of public transportation. 1. The analyst knows...

The government is considering an increase of the price of public transportation.

1. The analyst knows that the gasoline market would be indirectly affected. How? Explain.

2. The tax on gasoline adds 50 percent to the supply price. Assuming that the marginal cost of producing gasoline is $2 per gallon, that these marginal costs are constant and that no externalities result from the consumption of gasoline, should we consider any additional costs or benefits form the secondary market? (No need to compute, just explain)

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Answer #1

1. If the cost of public transport increases the people will prefer to drive themselves more then using public transport, which will ultimately increase the demand for gasoline.

2. Because the tax on gasoline adds 50 percent to the supply price and the marginal cost of gasoline is $2 is constant then yes any additional cost or benefit will form the secondary market because entry cost is low and taxes can always be mentioned to not adding to the economic well being and get neglected.

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