2.8 The Market Effect of a Carbon Tax. Consider the market for gasoline. In the

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2.8 The Market Effect of a Carbon Tax.

Consider the market for gasoline. In the initial equilibrium, the price is $2.00 per gallon and the quantity is 100 million gallons. The price elasticity of demand is 0.70 and the price elasticity of supply is 1.0. Suppose a carbon tax shifts the supply curve upward by $0.14 and to the left by 17%.

a.       Use a graph to show the effects of the tax on the equilibrium price and quantity of gasoline.

b.      After reviewing the price-change formula in the earlier chapter on elasticity, compute the new price and quantity. The new price is $____ per gallon and the new quantity is ____ million gallons.

c.       Consumers pay $__ of the $0.34 tax and producers pay the remaining $___ of the tax.

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