Reduce the budget deficit

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As part of his plan to reduce the budget deficit, President Clinton proposed raising the excise tax on gasoline by 50 cents per gallon. While passage of this proposal was blocked by Congress, what would have happened to the sales of gasoline if the price of gasoline were to rise by 45 cents per gallon (i.e., producers cannot pass the entire 50-cent tax increase on to consumers)? Assume that the average price of gasoline is now $1.30 per gallon and use the short-run price elasticity for gasoline presented in Illustration 6.2 (page 231 of the text) to answer this question. Would you have expected consumers’ total expenditure on gasoline to have risen or fallen had Clinton’s proposed 50-cent-per-gallon excise tax been enacted? Explain.

Reference no: EM131083518

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