Assume that the demand for gasoline is inelastic and supply is relatively elastic. The government imposes a sales tax on gasoline. The tax revenue is used to fund research into clean fuel alternatives to gasoline, which will improve the air we all breathe.
a. Who bears more of the burden of this tax, consumers or producers? Show in a diagram who bears how much of the excess burden.
b. Is this tax based on the benefits principle or the ability - to - pay principle? Explain.