For five years, an oil drilling company has profitably operated in the state of Alaska (the only place it operates). Last year, the state legislature instituted a flat annual tax of $100,000 on any company extracting oil (or natural gas) in Alaska.
a) Suppose that the state levies a proportional income tax (say 10% of net income). How would this tax affect the amount of oil the company extracts? Explain.
b) Now suppose that the company has a limited number of drilling rigs extracting oil at Alaskan sites and at other sites in the United States. What would be the effect on the company's oil output in Alaska if the state levied a proportional income tax as above in a.