A government decides to reduce air pollution by reducing the use of petrol and imposes a

specific tax of 0.50 on energy companies for each litre of petrol sold.

a. Use a supply and demand diagram and show the effect of the tax on consumer and

producer surplus and comment on the incidence of the tax on consumers of energy and

producers of energy. (10 points)

b. Should it impose this tax on petrol companies or motorists? Explain, using a supply

and demand diagram. (10 points)

c. If the demand for petrol were more price elastic, would this tax be more effective or

less effective in reducing the quantity of petrol consumed? Explain with both words

and a diagram. (10 points)

d. Are consumers of petrol helped or hurt by this tax? Why? (5 points)