Question

the government decides to reduce air pollution by reducing the use of petrol it imposes ZAR0 50 tax for each litre of petrol sold.

a. should it impose this tax on petrol companies or motorists, explain using a supply and demand diagram.

b. if the demand for petrol were more price elastic , would this tax be more effective or lee effective in reducing the quantity of petrol consumed, explain using relevant diagrams.

c. are consumers of petrol helped or hurt by this tax , why.

d. are workers in the oil industry helped or hurt by this tax, why.

Answer 1

a) Tax imposed by government fall on both side either it is a consumer or producer in the proportion of their elasticities, no matter on whom it is imposed. In the diagram below (assuming demand and supply are equally elastic), price is Pe and output is Qe at equilibrium. After tax, output fall to Qt while price paid by buyer rises to Pc and price received by producer fall to Pp.

b) If demand is more elastic than supply, it will not affect quantity traded after tax while only affect the price paid by consumer and price received by producer.

c) As demand is more elastic, price paid by consumer rise by less proportion of total tax, consumers are less hurt.

d) Price received by producer fall by more proportion of tax which force firm to cut some of their expenses which will hurt workers in firm there.