Suppose the government were considering increasing the federal tax on gasoline by 50 cents per gallon. in the course of hearings on the proposed legislation, a consumer advocate argued that the tax would simply be another burden on consumers, for gasoline producers would merely pass the tax on to consumers in the form of higher prices. Using your knowledge of Economics, analyze the consumer advocate's argument. in particular, use graphs to show the effect that this type of tax would have on consumers and producers. Also, what are some crucial factors that would cause wither consumers or producers to bear the burden of the tax? In answering the question, assume that gasoline is sold under competitive conditions.

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When analyzing the impact of a tax on gasoline we can use the economic concept of tax incidence which refers to the distribution of the tax burden bet... View the full answer