Taxing Gasoline It is well known that the price elasticity of demand for gasoline is very low. The price elasticity of supply for gasoline is relatively high. To reduce imports of foreign oil, it has been proposed that the United States impose a substantial tax on gasoline. 1. Graph the approximate shape of demand and supply curves in the market for gasoline, and indicate the initial equilibrium price and quantity before there is a tax. Price Gasoline 2. Now assume that the government imposes an additional gas tax on sellers. Show the effect on the market. Given the shape of demand and supply curves, who do you expect will pay most of the tax? What will happen to the total quantity of gasoline sold? What will happen to the spending of consumers on gasoline? 3. Would the tax be effective in reducing gasoline imports? Would the tax be effective in raising tax dollars for the government? 4. Alternatively, suppose that gasoline substitutes such as gasohol become widely available, and the tax is applied only to gasoline. How would this affect the elasticity of demand for gasoline? Would the tax be more or less effective now in reducing imports? In raising tax dollars