Gas Prices Hit Record Highs as States Eye Fuel Tax Pauses

EconEye Admin

4 years ago

New York has suspended its 16-cent-per-gallon gas tax through the end of the year, a move that Gov. Kathy Hochul estimated would provide “$609 million in direct relief” to residents.—washingtonpost.com

Answer the following questions to check your understanding of the story.

The demand for gasoline is inelastic but not perfectly inelastic. Who gains from the suspension of the gas tax?

a) Buyers benefit, but sellers do not.

b) Both buyers and sellers benefit, but sellers benefit more.

c) Buyers and sellers benefit equally.

d) Both buyers and sellers benefit, but buyers benefit more.

When demand for a good is inelastic, is the tax paid split evenly, or do buyers and sellers pay different amounts of the tax? When the gas tax is suspended, who benefits more?

When demand for a good is inelastic, buyers and sellers split the tax paid, but buyers pay more of the tax. So, when the gas tax is suspended, both buyers and sellers benefit, but buyers benefit more.

Gasoline has a federal tax and a state tax. What is the effect on the market for gasoline when the state tax is removed?

When the state tax is removed, _____________.

a) consumer surplus decreases, producer surplus increases, and deadweight loss increases

b) consumer surplus increases, producer surplus increases, and the market becomes more efficient

c) consumer surplus and producer surplus don’t change, but the market becomes more efficient

d) consumer surplus increases, producer surplus decreases, and deadweight loss is eliminated

When the state tax is removed, what happens to the price paid by consumers and the quantity of gasoline bought? What happens to the price received by producers and the quantity of gasoline sold? Do consumer surplus and producer surplus change? What happens to deadweight loss?

When the state tax is removed, consumers buy more gasoline and pay a lower price, so consumer surplus increases. Producers sell more gasoline and receive a higher price, so producer surplus increases. The quantity bought and sold increases but remains below the efficient quantity because the federal tax remains in place. The market becomes more efficient.

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