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5. Petroleum product manufacturing is one of the most capital-intensive industries in Canada. Use a general...

5. Petroleum product manufacturing is one of the most capital-intensive industries in Canada. Use a general equilibrium framework to discuss the possible incidence of a tax on petroleum products.

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A capital intensive good means, it takes huge capital and other financial resources to produce the good. Possible incidence of a tax on capital intensive good will increase the cost of production and thus production will not remain viable anymore. In case of Canada, The tax reduces the demand for petroleum products. Since the sector is capital intensive, relatively more capital than labour will be released to other sector of the economy. Hence in a closed economy the relative price of capital must fall.

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