4.9 As of 2013, the federal specific tax on gasoline is 18.4¢ per gallon, and state specific taxes ranges from 8¢ in Alaska to 43¢ in California. A statistical study (Chouinard and Perloff, 2004) found that the incidence (Chapter 3) 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¢: Retail consumers bear half the tax incidence.

In contrast, when a state that uses regular gasoline increases its specific tax by 1¢, the incidence of the tax falls almost entirely on consumers: The retail price rises by nearly 1¢.

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. (Hint:

Consider the residual supply curve facing a state compared to the supply curve facing the nation.)

c. Using the residual supply equation (Equation 8.6), 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. A