Assume the price of gasoline is $2.00 per gallon, and the equilibrium quantity of gasoline is 10 million gallons per day with no tax on gasoline. Starting from this initial situation, which of the following scenarios would result in the largest deadweight loss?
A)The price elasticity of demand for gasoline is 0.1; the price elasticity of supply for gasoline is 0.6; and the gasoline tax amounts to $0.20 per gallon.
B)The price elasticity of demand for gasoline is 0.1; the price elasticity of supply for gasoline is 0.4; and the gasoline tax amounts to $0.20 per gallon.
C)The price elasticity of demand for gasoline is 0.2; the price elasticity of supply for gasoline is 0.6; and the gasoline tax amounts to $0.30 per gallon.
D)There is insufficient information to make this determination.

Question

Quizplus · Accepted Answer

The deadweight loss of a tax increases with the elasticity of both supply and demand. Scenario C has higher elasticities for both demand and supply compared to the other scenarios, and a higher tax, leading to a larger deadweight loss.

Assume the Price of Gasoline Is $2