Informations given:

Fuel duty: petrol=0.5795 diesel=0.5795

Prices: petrol=147.3 diesel=151.0

Quantity consumed: petrol=13.1 bn litresdiesel=25.1 bn litres

The price elasticity of demand is about (0.6). Assume that the supply is dictated by the world market and it is perfectly elastic (at the world price plus delivery cost).

Hint: Read about tax incidence and the role of elasticities.

1. Suppose that a new government abolishes Fuel Duty. How would the market price the quantity change? What if the supply of petrol is not perfectly but very elastic, equal to (+3).
2. Suppose that supply is perfectly elastic, but that the world price of oil/petrol goes up by 10%. If the government continues to charge the Fuel Duty, what happens with the government tax revenues?