The state needs to raise money, and the governor has a choice of imposing an excise tax of the same amount on one of two previously untaxed goods: restaurant meals or gasoline. Both the demand for and the supply of restaurant meals are more elastic than the demand for and the supply of gasoline. If the governor wants to minimize the deadweight loss caused by the tax, which good should be taxed? For each good, draw a diagram that illustrates the deadweight loss from taxation. g. Assume that demand for gasoline is inelastic and supply is relatively elastic. The government imposes a sales tax on gasoline. The tax revenue is used to fund research into clean fuel alternatives to gasoline, which will improve the air we all breathe.

a. Who bears more of the burden of this tax, consumers or producers? Show ina diagram who bears how much of the burden.

b. Is this tax based on the benefits principle or the ability-to-pay principle? Explain.