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Suppose that the world price of oil is $70 per barrel and that the US can buy all the oil it wants at this price. Suppose also that the demand and supply schedules for oil in the US are as follows:
Price $ per barrel US Quantity Demanded US Quantity Supplied
68 16 4
70 15 6
72 14 8
74 13 10
76 12 12
a. On graph paper, draw the supply and demand curves for the US.
b. With free trade in oil, what price will Americans pay for their oil: What quantity will Americans buy? How much of this will be supplied by Americans producers? How much will be imported? Illustrate total imports on your graph of the US oil market.
c. Suppose the US imposes a tax of $4 per barrel on imported oil. What quantity would Americans buy? How much of this would be supplied by American producers? How much would be imported? How much tax would the government collect?
d. Briefly summarize the impact of an oil import tax by explaining who is helped and who is hurt among the following groups: domestic oil consumers, domestic oil producers, foreign oil producers, and the US government.
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