Consumers in the states that do not remove the tax

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Reference no: EM131878308

Suppose that after the hurricane, the ten-cent tax is removed in some states but not in others. The states where the tax is removed constitute just half of the demand in the United States. Thus the demand schedule in each half of the country is Q = 120−15P, where P is the price paid by consumers in that part of the country. Let P∗ be the equilibrium price for consumers in the part of the country where the tax is removed. In equilibrium, suppliers must receive the same price per gallon in all parts of the country. Therefore the equilibrium price for consumers in states that keep the tax must be $P∗+$0.10. In equilibrium it must be that the total amount of gasoline demanded in the two parts of the country equals the total supply. If half of the states remove the gasoline tax, some groups will be better off and some worse off.

Describe the gains or losses for each of the following groups:

(1) Consumers in the states that remove the tax

(2) Consumers in the states that do not remove the tax

(3) Gasoline suppliers

(4) Governments of the states that remove the tax

(5) Governments of states that do not remove the tax

Reference no: EM131878308

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