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Author Question: Over twenty years ago the city of Washington D.C. was facing a budgetary shortfall. In a plan to ... (Read 73 times)

OSWALD

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on: Jun 29, 2018
Over twenty years ago the city of Washington D.C. was facing a budgetary shortfall. In a plan to increase tax revenue the mayor and city council agreed to raise the excise tax on gasoline.
 
  Typically for goods like gasoline which are price inelastic this should have led to an increase in tax revenue. However, just the opposite happened  tax revenue plummeted What could explain this seemingly paradoxical result?

Question 2

If a marginal cost pricing rule is imposed on the firm in the figure above, the deadweight loss will be
 
  A) zero.
  B) 100.
  C) 200.
  D) 50.


katkat_flores

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Reply #1 on: Jun 29, 2018
Answer to Question 1

In order to determine whether a good or service is price elastic or inelastic it is important how narrow or broad the market is defined. Typically, the broader the market, the more inelastic is the demand and vice versa. In the case of Washington D.C. gasoline the market is defined very narrowly. There are many substitutes for Washington D.C. gasoline. Commuters can simply pump for gas near their homes in Maryland and Baltimore before heading to work. In other words, even though gasoline broadly speaking is price inelastic in the present case Washington D.C. gasoline was quite price elastic because of the relatively large number of nearby substitutes.

Answer to Question 2

A


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