The diagrams below show the market for gasoline in two countries, Midas and Neptune. In Midas, demand is perfectly inelastic; in Neptune, demand is relatively elastic. In both countries, supply is identical and upward sloping. The government in each country imposes an excise tax of $t per litre on the producers of gasoline. This tax shifts the supply curve up by $r.

a. In each case, shade the area that is the direct burden of the tax.
b. In each case, shade the area that is the excess burden of the tax.
c. In which country does the tax cause the greater allocative inefficiency? Explain.

Transcribed Image Text:

Demand Supply 0 Midas Supply Demand 0 Neptune