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Scenario: People have been noticing that traffic is going from bad to worse. To fix this, policymakers have decided to impose a tax on gasoline.

Scenario: People have been noticing that traffic is going from bad to worse. To fix this, policymakers have decided to impose a tax on gasoline. If the price elasticity of demand for gasoline is 0.02, would this tax help reduce traffic on the road?

Next, if cross elasticity of demand for train tickets in terms of gasoline prices is 0.59 (which is positive), should we be focusing on creating subsidies for train tickets to reduce traffic? Would this be more effective than imposing a gasoline tax? Why?

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