Use the figure below to answer the following question(s) . Figure 4-7
Refer to Figure 4-7. The supply curve S₁ and the demand curve D indicate initial conditions in the market for gasoline. A $.60-per-gallon excise tax on gasoline is levied. How much revenue does the $.60-per-gallon tax generate for the government?

Question

Use the figure below to answer the following question(s) . Figure 4-7

Refer to Figure 4-7. The supply curve S₁ and the demand curve D indicate initial conditions in the market for gasoline. A $.60-per-gallon excise tax on gasoline is levied. How much revenue does the $.60-per-gallon tax generate for the government?

Quizplus · Accepted Answer

The tax increases the price of gasoline from P1 to P2, with the vertical distance between the two points representing the amount of the excise tax. The quantity of gasoline demanded falls from Q1 to Q3, while the quantity supplied remains unchanged. The government revenue generated from the tax is equal to the tax per unit multiplied by the quantity sold, which is ($.60)(Q1-Q3) or ($.60)(14-10) = $2.40 per gallon. Multiplied by the total quantity sold, the revenue generated is ($2.40)(140 billion gallons) = $336 billion. However, since the tax revenue is divided between consumers ($96 billion) and producers ($240 billion), the amount of revenue generated for the government is ($240 billion) - ($96 billion) = $144 billion, which is approximately equivalent to answer choice B.

Use the Figure Below to Answer the Following Question(s)