The federal specific tax on gasoline is 18.4¢ per gallon, and the average state specific tax is 20.2¢, ranging from 7.5¢ in Georgia to 25¢ in Connecticut. A statistical study (Chouinard and Perloff, 2004) finds that the incidence of the federal specific tax on consumers is substantially lower than that from state specific taxes. When the federal specific tax increases by 1¢, the retail price rises by about 0.5¢, so that retail consumers bear half the tax incidence. In contrast, when a state that uses regular gasoline increases its specific tax by 1¢, the retail price rises by nearly 1¢, so that the incidence of the tax falls almost entirely on consumers.

a. What are the incidences of the federal and state specific gasoline taxes on firms?

b. Explain why the incidence on consumers differs between a federal and a state specific gasoline tax, assuming that the market is competitive. (Consider the residual supply curve facing a state compared to the supply curve facing the nation.)

c. Using the residual supply elasticity in Equation 8.17, estimate how much more elastic is the residual supply elasticity to one state than is the national supply elasticity. (For simplicity, assume that all 50 states are identical.)

Equation 8.17,