According to The Tax Foundation, an independent tax policy research organization, “the first U.S. state to levy a gasoline tax was Oregon, which enacted a 1-cent per gallon tax in February 1919. During the following decade every U.S. state and the District of Columbia followed suit. In 2006 the average state gas tax was 20.8 cents per gallon. The federal gasoline tax was created with the Revenue Act of 1932, and began as a temporary levy with a rate of 1 cent per gallon. Over the years the tax has increased significantly, and in 2006 stood at 18.4 cents per gallon. The combined burden of federal, state and local gas taxes costs American drivers an average of 45.9 cents on every gallon purchased in 2006.”

a) Draw a supply and demand graph for gasoline in 2006. Assume the price of a gallon of gasoline is $2.49 at the pump.

Show the shift on the graph when sellers pay the tax

Show the price paid at the pump

Label the burden paid by consumers

Show the price of gasoline if no taxes were assessed.

When drawing the demand curve take into account if demand is elastic or inelastic

Shade the area which is tax revenue

Shade the area which is deadweight loss (if applicable)

b) Interpret the graph you created above by explaining how the tax burden is shared between buyers and sellers in this market. (No values necessary in your response.)

c) Is this tax efficient? If yes, explain why. If not, explain why the government would assess the tax.