Weekly 3: Analyzing a Gas Tax

Due Tuesday 2/11 via Teams by 2:00 pm

A couple of years ago the Washington DC metropolitan area had a large budget deficit and a severe problem with traffic congestion. This exercise is loosely based on a suggestion put forward at the time to increase the gasoline tax as a way to raise revenue and also decrease driving.

Suppose that for the purposes of gasoline demand, Washington households can be roughly divided into two groups: those with high income and those with low income, and that there are 1 million households of each type. The demand for gasoline by an individual household of each type is believed to be linear, as shown below:

`q_{h} = 3600 - 600*P^d`

`q_{l} = 2400 - 600*P^d`

Gasoline in Washington is supplied by 5,000 stations, and the supply by an individual station is believed to be linear:

`q_{s} = 360,000*P^s`

In addition, suppose the gas tax is initially zero and prices `P^d` and `P^s` are both $2.00. The proposal under consideration is to impose a $0.50 tax per gallon.

Please use the starter template distributed in the Weekly channel in Teams to construct a detailed spreadsheet similar to the one from class and use it to calculate all of the important variables for both business as usual (no tax) and the policy case ($0.50 tax).

The spreadsheet should provide results for all important individual and market variables, including changes and percentage changes between the BAU and policy (tax) cases. The template is just the start of the spreadsheet: you'll need to add rows and columns along the lines of the daily exercises in class.