Suppose that the gasoline retailing industry is perfectly competitive, constant-cost, and in long-run equilibrium. If the government unexpectedly levies a 5-cent tax on every gallon sold by gasoline retailers, depict what will happen to the representative firm’s cost curves. What will the effects of the tax be in the short run on industry output and price? Will the price rise by the full five cents in the short run? In the long run? How would your answers change if the industry was increasing-cost?
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