The government of Islandia, a small island nation, imports heating oil at a price of $2 per
Question:
The government of Islandia, a small island nation, imports heating oil at a price of $2 per gallon and makes it available to citizens at a price of $1 per gallon. Islandians' demand curve for heating oil is given by:
P = 6 – Q,
where P is the price per gallon in dollars and Q is the quantity in millions of gallons per year. Each of the 1 million Islandian households has the same demand curve for heating oil as shown in the diagram below.
How much consumer surplus would each household lose if it had to pay $2 per gallon instead of $1 per gallon for heating oil, assuming there were no other changes in the household budget?
Instruction: Enter your response rounded to two decimal places.
$ per year.
With the money saved by not subsidizing oil, by how much could the Islandian government afford to cut each family’s annual taxes?
Instruction: Enter your response rounded to two decimal places.
$ per year.
If the government abandoned its oil subsidy and implemented the tax cut, by how much would each family be better off?
Instruction: Enter your response rounded to one decimal place.
$ per year.
What would be the aggregate change in consumer surplus for the 1 million Islandian households if the subsidy were lifted for the benefit of a tax reduction?
There would be an aggregate (Click to select)gainloss of $ million per year, so the subsidy is (Click to select)inefficientefficient.