Question from Past Microeconomics Qualifying Exam[]

Spring 2001 - Section I, Question three, George Mason University

State first whether the following statements are true, false, or uncertain. Then briefly explain your reasoning in four or five sentences. You may use a graph if it helps clarify your answer.

If the government imposes an additional $0.1 tax per gallon of gasoline, then the after-tax price of gasoline will rise by $0.1.


Unless the price elasticity of demand for gas is perfectly inelastic we would expect both the producer and the consumer to give up some of the surplus which goes towards paying the collected tax.

I'm not so sure about this answer. See mine below.

The amount this excise tax will increase the price depands on the relative elasticites of the demand and supply curves. If the supply curve more elastic, then consumers will loose consumer surplus (and the producers will loose less surplus) as the prices rise high above equilibrium. If the demand curve is more elastic, then the producers will loose more producer surplus as the price rises slightly above equilbrium. Only if the supply curve is perfectly elastic (and the demand curve is also not perfectly elastic) will the price rise by exactly the value of the tax. The quantity sold will also fall, creating deadweight loss.

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