What fraction of the tax is passed forward to consumers

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Shifting a Tax on Home Heating Oil. You are an economic consultant to a member of Congress. Someone just introduced a bill that would impose a carbon tax of $100 per ton, which would shift the supply curve for heating oil upward by $0.30 per gallon and to the left by 15 percent. The initial (pretax) price of heating oil is $2.00.

a. Use a graph to show the effects of the tax on the price and quantity of heating oil. Will the entire tax be paid by consumers? If not, who else will bear part of the tax?

b. Suppose the price elasticity of the supply of heating oil is 1.0 and the price elasticity of demand is 0.50. Use the price-change formula developed in the chapter on elasticity to predict the new equilibrium price. What fraction of the tax is passed forward to consumers?

Reference no: EM131134526

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