Suppose that the political conflicts between the U.S. and oil exporting countries caused the oil exporting countries to institute an oil embargo against the U.S. Then the U.S. government started considering imposing a tax on gasoline in order to reduce the U.S. dependence on oil. The policy proposal was such that a unit tax per gallon will be collected and the tax revenues will be completely redistributed to consumers. Evaluate whether or not this policy proposal will improve the welfare of the society given the following:
Initially, Price of gasoline (pg) is $6, Price of other goods (po) is $4, and the Budget level of a typical consumer (m) is $180. Then a tax of $2 per unit of gasoline is introduced.
Utility maximization requires that o*/g*=2pg/ po