Question

Explain what would happen to either the supply curve, the demand curve, the price of gasoline and the quantity of gasoline traded at equilibrium if the following scenarios occurred. Provide a simple sketch of the appropriate shift in the appropriate curve.

3. If President Sanders (how did he get here into our hypotheticals?) increased pollution controls on the production of gasoline, what would happen in the market for gasoline?

Answer 1

The scenario can be explained with the supply-demand chart below.

The initial supply and demand curves for gasoline are given by S and D respectively with equilibrium price and quantity demanded at P and Q respectively.

With increased pollution controls on the production of gasoline, the pollution control measures translate into higher cost on stringent norms for the producers. This translates into decline in production and cost escalate on higher pollution control measures. The supply curve therefore shifts to the left from S to S1.

The resultant impact is that price of gasoline trends higher from P to P1 and the quantity demanded declines on a relative basis from Q to Q1. It is also worth noting that quantity demanded is unlikely to decline very significantly as demand for gasoline is relatively inelastic.