Korea imports crude oil and refines it to gasoline. Suppose all refineries have about the same technology and cost. Yet, they have a limited capacity to produce gasoline. In the winter, there is more than enough capacity to meet demand. But, in the summer, demand is higher, and domestic refining capacity cannot meet the entire demand. That is, some gasoline (i.e., already refined crude oil) must be imported from other countries. Importing gasoline has a delivery cost such that imported gasoline is more expensive than domestically refined gasoline. Assume that there is an unlimited supply of gasoline that can be imported with the extra delivery cost. Also, assume that no firm can profitably exercise market power.

a. Draw the supply curve for Korea's gasoline production and the demand curves for winter and summer.

The Korean government proposes a tax on domestically refined gasoline. The tax the legislators propose is smaller than the delivery cost of importing. The legislators also argue that the tax is on refineries, so consumers won't have to pay it, but some opponents of the tax disagree. Assume the current domestic and international production capacities do not change. Note that the government cannot tax refineries in other countries.

b. Draw the new supply curve for Korea's gasoline production.

c. What effect will the tax have on the price of gasoline and the profits of the refineries during the winter? What effect will it have during the summer?