Peter J Wilcoxen > PAI 300 Economics for Policy Analysis

Weekly 3: Analyzing a Gas Tax

Due Thursday 2/8

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_{high} = 3600 - 600*P^d`

`Q_{low} = 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_{sta} = 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 template distributed in the Weekly channel in Teams to construct a 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). Then fill in (1) the column calculating the change in each variable between the BAU and policy cases, and (2) the column showing those changes as percentages of their BAU values.

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Peter J Wilcoxen, The Maxwell School, Syracuse University
Revised 02/08/2024