A tax of €1.00 per litre on petrol

a. places a tax wedge of €1.00 between the price the buyers pay and the price the sellers receive.

b. decreases the price the sellers receive by €1.00 per litre.

c. increases the price the buyers pay by €1.00 per litre.

d. increases the price the buyers pay by precisely €0.50 and reduces the price received by sellers by precisely €0.50.

The correct answer is option a.

Explanation:

If a tax worth €1.00 per liter on petrol is imposed it will create a tax wedge of €1.00 between the price the buyers pay and the price the sellers receive.

A tax wedge can be defined as the deviation from the equilibrium price and equilibrium quantity due to the imposition of taxes.

When a tax is imposed on a product, the consumer and producer both have to share the tax burden. The price paid by the consumers increases and the price received by gets reduced.

The quantity of product gets reduced as well.