Suppose the world price of oil is $15 per barrel. At that price, the United States imports 400 million barrels daily and consumes 600 million barrels daily. The government then imposes a $5 per barrel tax on oil imports. For every dollar increase in oil prices, domestic consumption decreases by 20 million barrels per day, while domestic production increases by 40 million barrels per day.

1. What will be the new oil price (assuming world supply is perfectly elastic at $15)?

2. What will the new consumption, domestic production, and import levels be? How much will the government collect in taxes?

3. What will be the cost of inefficient production, loss in consumer surplus, and deadweight loss? (Use the triangle formula of 1/2 x price change x quantity change for both efficiency loss and consumer surplus loss.)

4. From an efficiency point of view, why would a$5 tax on all oil be better than the $5 tax on oil imports?