Question

For five years, an oil drilling company has operated profitably in the state of Alaska (the only place it operates). Last year, the state legislature instituted a flat annual tax of $100,000 on any company extracting oil (or natural gas) in Alaska. How would this tax affect the amount of oil the company extracts? Explain. Suppose instead the state imposes a wellhead tax---that is, oil companies must pay a tax of $2.00 on each barrel of oil extracted. How would this tax affect the amount of oil the company extracts? Explain.

Answer 1

DUe to this annual tax of $100,000 this will not have more effect on the oil company as it will either make small increase in price of barrel or either it thinks to pay from its profits as the tax will not affect the profits that company earned.

But in this case of 2$ per barrel the comapny will have to pay double the tax amount which is imposed per annual. Thus the company will try to make to cover this losses by imposing hike on the price of the barrels.

Ex: If company per month extracts some 10000 barrels of oil it means the company pays 2x10000 = 20000$ per month as a tax which means per year the company needs to pay 240000$ which is double the amount.

Thus this is how the affects of both these taxes.