Suppose that gasoline is not taxed in the country of Autopia, and the price of gasoline is $3.00 a gallon. In order to alleviate problems with air pollution and traffic, the government of Autopia decides to institute a $0.50 a gallon tax on gasoline. After the tax, the price of gasoline rises to $3.45 a gallon.
a. Assuming no other significant changes in the gasoline market, what can we conclude about the elasticity of demand for gasoline in Autopia?
b. Draw a supply-and-demand graph illustrating the effects of the gasoline tax. Assume that the supply of gasoline is not particularly elastic or inelastic.
c. Who has borne most of the burden of this tax, consumers or producers?
d. Do you think that the tax will be effective in reducing Autopia's problems with air pollution and traffic? Why or why not? Support your answer with reference to your graph.