--%>

Gasoline market-Demand and supply problem

Let us suppose that US gasoline market has the demand and supply curves
Qd = 10 – 0.5Pd
Qs = -2 + Ps when Ps ≥ 2 and Qs = 0 if Ps < 2,

Here quantities stand for millions of gallons per year and prices refer to the amount of $ per gallon

(i) With no tax, determine the equilibrium price and quantity?

(ii) Assume that the government imposes an excise tax of $3 per gallon. Then what will the new equilibrium quantity? Determine the price which buyers pay? And what price will sellers receive?

(iii) Determine the impact of this tax on the consumer excess and the producer excess. In addition, compute the tax collection from government and the welfare deadweight loss.

E

Expert

Verified

With a $3 tax, setting Qd = Q implies

10 - 0.5 (Ps + 3) = -2 + P

After replacing into the equation for Pd implies Pd = 10.  Replacing this price into the equation for quantity demanded entails  million.  At such prices and quantities, consumer excess is $25 million, producer excess is $12.5 million, and government tax receipts are $15 million. The deadweight loss is $1.5 million. The deadweight loss evaluates the difference among potential net benefits ($54 million) and the total benefits which are really attained ($25 + $12.5 + $15 = $52.5 million).

   Related Questions in International Economics

  • Q : Circular Flow model of a private economy

    The simple circular flow model of a private economy describes how income and resources flow among: (1) Households and business associations. (2) Corporations and government agencies. (3) Sole corporations and proprietorship (4) Business associations a

  • Q : LORENZ CURVE THE AREA BETWEEN THE

    THE AREA BETWEEN THE LORENZ CURVE OF A COUNTRY AND THE DIAGONAL OF PERFECT EQUALITY REPRESENT

  • Q : Define balance of payment or BOP

    Balance of payment: It is a systematic record of each and every economic transaction of a country with the rest of world in an accounting year.

  • Q : Equilibrium price of grape jelly problem

    Peanut butter, jelly sandwiches and tuna fish sandwiches are replacements. Assume an international agreement decreased the worldwide catch of tuna by half. The equilibrium price of grape jelly would be: (1) Increases while the equilibrium quantity is reduced. (2) Drop

  • Q : Who was 1970 Nobel Laureate in Economics

    Who was 1970 Nobel Laureate in Economics?

  • Q : Describe the meaning of deficit in BOP

    Describe the meaning of deficit in BOP: Whenever autonomous foreign exchange payments surpass autonomous foreign exchange receipts, the difference is termed as balance of payments deficit.

  • Q : Why Supply of foreign exchange is made

    Supply of foreign exchange: (A) By exports of services and goods(B) Direct foreign investment in residence country(C) For approximate purchases by non-residents in the home country(D) Remittances

  • Q : What is managed floating exchange rate

    Managed floating exchange rate: This is a system in which the central bank or Government permits the exchange rate to identify market forces although they take decisions to intervene whenever they feel it suitable.

  • Q : International monetary system safeguard

    safeguard against the crisis of confidence in system explain

  • Q : Determining total receipts-Balance of

    When Balance of payment of a country is Rs (-) 100 crores and total payment are Rs 500 crores. Determine its total receipts.