Question 4. [6 marks]

Federal government is considering a temporary cut to the fuel excise tax to reduce the price of petrol in Australia. See for example: "Budget 2022: Temporary cut to fuel excise to slash petrol prices" published at news.coma.au on March 21, 2022. (PDF version can be found on Moodle). For the purposes of this question assume that the petrol market is competitive and that the excise tax is paid by the suppliers.

(a) Use the model developed in Q3 to predict how the proposed policy (reduction in the fuel excise tax) will affect the equilibrium in the domestic market for petrol. Illustrate your answer on a graph, including all relevant supply and/or demand shifts and the corresponding changes in the equilibrium price and quantity.

(b) Evaluate this policy from the point of view of social welfare. What the benefits of this policy? What are the costs of this policy that will be born by all members of the society? Do you think this is a good policy overall? Explain you answer.