Question:
To reduce imports of foreign oil, it has been proposed that the United States impose a substantial tax on gasoline. However, it is well known that the short-run elasticity of demand for gasoline is very low. What will happen to the total quantity of gasoline sold if there is an additional gasoline tax? Would the tax be effective in reducing gasoline imports? Would the tax be effective in raising tax dollars for the government?
Alternatively, suppose that gasoline substitutes such as gasohol become widely available, and the tax is applied only to gasoline. How would this affect the elasticity of demand for gasoline? Would the tax be more or less effective now in reducing imports?