Tax incidence determination by elasticity
1. What is “tax incidence”? Describe how a $1 per gallon increase in the gas
tax will result in an after-tax price increase that is less than $1
2. How does the increase in the after-tax price depend on the price elasticity of demand
and the price elasticity of supply?
3. Burning gasoline creates pollution? Is this pollution a negative
externality? If so, use social cost and demand to graphically
depict how you could “correct for the negative externality. ( Just show direction – don’t need numbers – Just want to understand how this would look on a graph)