Parties occasionally propose cutting federal gasoline tax

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Reference no: EM131173155

US politicians from both parties occasionally propose cutting the federal gasoline tax (which is a unit tax) only during the summer months, when prices tend to increase. Assume that gasoline refineries run near full capacity during the summer, so they are unable to increase supply in the short term (their supply curve is perfectly inelastic). Also assume that consumers have some ability to substitute away from gasoline (foe example driving fewer miles, so that their demand curve is downward sloping). If this proposal were implemented, how would the benefit of the tax cut be divided between consumers and suppliers of gasoline? Use a diagram to support your answer. (Hint: A tax cut is the opposite of a tax increase, so start assuming that there is already a tax in the market and that it is reduced in size)

Reference no: EM131173155

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