Question

In this question, we’ll look at the effects such a tax would have on the market for gasoline. Let’s make these assumptions:

• Gasoline producers are profit-maximizing competitive firms.

• The gasoline industry is a constant-cost industry. (That is, all gasoline producers and all potential entrants to the industry have the same cost curves.)

• The market for gasoline starts out in long-run competitive equilibrium.

1) Short-run analysis: How will the tax affect the market price of gasoline, the total market quantity supplied, the quantity supplied by a typical gasoline producer, and the profits of a typical gasoline producer in the short run? Illustrate your short-run analysis on the graphs

Answer 1

Sol 1 :

Effect of Tax in the market :

• Increase in taxes will induce the producer to reduce its supply
• And increase in taxes will increase the prices of the goods which is obviously higher than the equilibrium price. And the price for each goods that the producer will recieve will be lower than before.
• If price the seller recieves decreases , then the profit made by the seller also decreases.

Diagram showing the effect of tax on the market :