Question

1. In a presidential campaign, a candidate proposes a 50 cent per gallon tax on gasoline. The idea of a gasoline tax is both to raise government revenue and to reduce oil consumption and the country’s dependence on oil imports. The Demand and supply functions are given by Qd=150-50P and Qs=60+40P respectively. If the candidate is voted into power and the policy is adopted:

1. Calculate the equilibrium quantity and price before tax.(1 mark)
2. What will be the equilibrium quantity and price after the tax
3. Calculate the loss in Consumer surplus and producer surplus ( 2 marks)
4. Calculate the Deadweight Loss (1 mark)
5. Graphically present the equilibrium price and quantity before and after the tax, and show on the graph the dead weight loss.
6. Refer to the graph above to explain the effect of the tax on social welfare (as measured by the net change in consumer surplus and producer surplus) ( 1 mark)
7. How much tax revenue does the government collect (1 mark)
8. How much of the tax does the consumer and the producer bear? Why does the other bear more of tax?

Answer 1