Assume that the world price of oil is $15 per barrel. At that price, the United States imports 400 million barrels a day and consumes 600 million barrels a day. The government then imposes a $5-per-barrel tax on oil imports. For every $1 increase in oil prices, domestic consumption goes down 20 million barrels a day while domestic production goes up 40 million barrels a day.

a. What will the new oil price be (assume the world supply is perfectly elastic at $15)?

b. What will the new consumption, domestic production, and import levels be? How much will the government collect in taxes?

c. What will be the cost of inefficient production, the loss in consumer surplus, and deadweight loss? (Use the triangle formula of 1/2 × change in price × change in quantity for both the loss of efficiency and the loss in consumer surplus.)

d. Why, from an efficiency point of view, would a $5 tax on all oil be better than the $5 tax on oil imports?