After the government imposed a $0.20 per gallon tax on gasoline, the price of a gallon of gasoline increased from $1.00 to $1.15. Which of the following statements is true?

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BlackTom AI · Accepted Answer

First, I restate the scenario and the options to ensure we’re analyzing the same information. The government imposes a $0.20 per gallon tax on gasoline. Before the tax, the price to consumers is $1.00 per gallon; after the tax and market adjustments, the price becomes $1.15 per gallon. The options present different claims about who bears the tax burden under this scenario.

Option 1: 'Consumers bear most, but not all, of the tax burden.' This statement aligns with the basic principle of tax incidence: the actual burden depends on elasticities of supply and demand. If consumers face a price increase of 0.15 while the statutory tax is 0.20, it implies producers absorb some of the tax (they receive less net price after tax), and consumers bear a large share of the burden, though not the entire tax amount. This is a plausible outcome in many real-world markets, especially for goods like gasoline where demand is relatively inelastic in the short run—and consumers tend to bear a large portion of the tax.

Option 2: 'There is no tax burden, since gasoline is a normal good.' This is incorrect because labeling a good as 'normal' does not remove tax incidence. Taxes always create some burden; the question is how that burden is split between buyers and sellers, not whether it exists at all. The observed price change in the market indicates there is a tax burden.

Option 3: 'Consumers and producers share the tax burden equally.' Equal sharing would require the price change to reflect exactly half the tax on consumers and half on producers, but the observed price increase (0.15) is less than the $0.20 tax, indicating producers are also absorbing some of the burden. In addition, equal sharing would be a specific outcome depending on elasticities, which is not implied by the given numbers. Therefore this is not the best description of the given scenario.

Option 4: 'Producers bear the entire burden of the tax, since the tax was levied on producers, not consumers.' While the tax is collected from producers, the incidence does not automatically fall entirely on them. The net price to producers and the price to consumers adjust according to elasticities; the data (consumer price up by 0.15, tax of 0.20) shows consumers face part of the burden, not zero. Hence this statement is incorrect.

Option 5: 'Consumers bear the entire burden of the tax, since producers can pass the tax along to consumers.' If producers could pass the entire tax to consumers, we would expect the consumer price to rise by the full $0.20. However, the observed increase is only $0.15, not $0.20, indicating that producers do not entirely pass the tax to consumers. This makes the statement false.

In summary, evaluating the shifts in price and the general principle of tax incidence leads to the conclusion that consumers bear most, but not all, of the tax burden. The other options claim either no burden, equal sharing, or full burden on one side without matching the observed price change and the standard incidence logic.

AP Economics-Hillebrand AP Microeconomics Sem 1 Exam 2025 - Requires Respondus LockDown Browser

After the government imposed a $0.20 per gallon tax on gasoline, the price of a gallon of gasoline increased from $1.00 to $1.15. Which of the following statements is true?

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AP Economics-Hillebrand AP Microeconomics Sem 1 Exam 2025 - Requires Respondus LockDown Browser

After the government imposed a $0.20 per gallon tax on gasoline, the price of a gallon of gasoline increased from $1.00 to $1.15. Which of the following statements is true?

View Explanation

Log in for full answers

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