Washington State gas taxes will rise by 7cents a gallon now and by a further 4.9cents a gallon next summer. Source: The Seattle Times , August 1, 2015 If the demand for gasoline is inelastic and the supply of gasoline is elastic, who will pay more of the increase in Washington's gas tax: drivers or the gasoline companies?

Question

Business

Chaim Silva

1 March, 14:34

Washington State gas taxes will rise by 7cents a gallon now and by a further 4.9cents a gallon next summer. Source: The Seattle Times , August 1, 2015 If the demand for gasoline is inelastic and the supply of gasoline is elastic, who will pay more of the increase in Washington's gas tax: drivers or the gasoline companies?

+2

Answers (1)

Know the Answer?

Bennett Conway · Answer 1

Drivers

Explanation:

Washington State gas taxes will rise by 7 cents a gallon now and by a further 4.9 cents a gallon next summer. If the demand for gasoline is inelastic and the supply of gasoline is elastic, Drivers will pay more of the increase in Washington's gas tax.

This question is trying to test tax incidence as to where an increase in tax on a commodity will lie and who will bear the tax burden.

If the demand for a good is inelastic it means that buyers will not respond so much to increase in price because they view the product as a necessity. Therefore if suppliers choose to increase the price of gasoline with the value of the tax, those buyers of gasoline (drivers) will still buy.

In such a situation the gasoline companies will shift tax burden to the drivers.