The government raises gasoline taxes as part of the price of gasoline and receives more tax revenues. However, after five years, the government discovers that revenues from the gasoline tax have declined. This situation would be most likely to occur if

Question

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In the short run, consumers may not be able to immediately reduce their gasoline consumption despite the increase in price due to the inelasticity of demand. However, in the long run, consumers may switch to more fuel-efficient or alternative modes of transportation, reducing their demand for gasoline and resulting in a decline in tax revenues for the government. This would be consistent with a scenario where the demand for gasoline is inelastic in the short run but elastic in the long run.

The Government Raises Gasoline Taxes as Part of the Price