Question

suppose the government increases the tax rate on the oil refinery companies, and at the same time it provides poor citizens with gasoline stamps that would lower the price of gasoline at the pump for them. what would be the effect of these two policies on the price and quantity of gasoline sold in the marketplace? explain your answer using your knowledge of supply and demand.

Answer 1

Since there is a tax rate on the oil refinery companies, this will imply more production cost. Thus, there will be less supply of oil at each price. Now, for the poor people, a subsidy is given to purchase oil. Thus, for them the price of oil is lesser than the actual price, this will increase the demand for poor people and they will consume more.

Thus, we can conclude that as a result of this policy, the price will be higher than the perfect market price. The non-poor section of society will consume less oil. Now, whether the poor section will consume more or less will depend on whether tax or subsidy is higher. Thus, the overall effect of quantity sold is uncertain.