Let D equal the domestic demand for oil, Sd equal the domestic supply and Si equal imported supply of oil for gasoline. Assume the world supply is infinitely elastic and the domestic supply is more price sensitive. Assume we currently import some oil and produce some for the domestic market.
a. Graphically illustrate the scenario above.
b. Our domestic policy objective is to ‘minimize dependence on imported oil.’ Illustrate the effect of 1) an import tax on oil, 2) a domestic oil subsidy, and 3) domestic investment in hydrogen powered vehicles could meet that policy objective. Discuss the welfare implications of each policy option.
c. If the discovery of more domestic oil near the surface makes the domestic supply curve more elastic, show graphically what happens to the effectiveness of the interventions in part b to meet our domestic policy objective