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The U.S. government is considering the implementation of a carbon tax to fight climate change and raise government revenue. They have asked you to help
The U.S. government is considering the implementation of a carbon tax to fight climate change and raise government revenue. They have asked you to help them determine how much gasoline demand will drop and how much revenue will be raised following the implementation of a $200 carbon tax (per ton of CO2). After some rigorous statistical work, you determine that the short-run demand elasticity of gasoline is 0.3. Under current market conditions, the average annual consumption of gasoline by a household is 850 gallons, and the production market for gasoline is perfectly competitive with a marginal cost of producing one gallon (average sales price) of $3.50. In addition, please make the following assumptions: (1) each gallon of gas contains 20 lbs. of CO2 with 2,000 U.S. lbs. in a ton and (2) there are 140 million households in the U.S
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