Suppose that the long-run price elasticity of demand for gasoline is -0.55. Assume that the price of gasoline is currently $3.00 per gallon, the equilibrium quantity of gasoline is 140 billion gallons per year, and the federal government decides to increase the excise tax on gasoline by $1.00 per gallon. Suppose that in the long run, the price of gasoline increases by $0.70 per gallon after the $1.00 excise tax is imposed.
a. What is the new quantity of gasoline demanded after the tax is imposed? How effective would a gas tax be in reducing consumption of gasoline in the long run?
b. How much does the federal government receive from the tax?