Concept: Tax Incidence 1 Question Help * Consider the market for gasoline illust

Question

Concept: Tax Incidence 1 Question Help * Consider the market for gasoline illustrated in the figure to the right. Suppose the market is perfectly competitive and initially in equilibrium. 7.00- Now suppose the government imposes a gasoline tax of $1.50 to be paid for by producers. The effect of this tax is illustrated in the figure to the right. 4 500 4 3.50t Who bears the burden of the tax? Consumers pay S of the $1.50 tax (enter a numenic response using a real number rounded to two decimal places) 2.00- 1.50- 1.100 0 10 20 30 40 50 60 70 80 90 100 Quantity of gasoline

Explanation / Answer

Both the producer and consumer bear the burden of tax. Consumer pay $ 1.00 of the $ 1.50 tax. Explanation: Original price of product before tax: $2.50 per unit New price after tax :   $ 3.50 per unit Tax burden borne by consumer = 3.50 - 2.50 = 1.00 per unit Tax burden borne by producer = Total tax - 1.00 = 1.50 - 1.00 = 0.50 per unit

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