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?
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.
You might also like to view...
Given that resources can be allocated by the government, the market, a random process, or on a first-come first-serve basis, which of the following statements is true?
a. The market system is not entirely fair but it creates incentives to increase supplies and improve standards of living. b. The random process of allocation allows individuals to acquire purchasing power and enhances the value of the resources that they own. c. Since the government system does not distinguish between those who have income and those that do not, government allocation of resources is the most efficient. d. There will be no shortages under the first-come first-serve basis of allocation. e. A random process of allocation is fair in the sense that everyone gains and there are no losers.
The demand for a pack of gum is ________ than is the demand for a steak because ________.
A. less price elastic; a pack of gum is more of a luxury. B. less price elastic; a pack of gum requires a smaller portion of one's income. C. more price elastic; a pack of gum is more of a luxury. D. more price elastic; a pack of gum requires a smaller portion of one's income.