This is a challenging question intended for those students who like mathematics. It will help you work through the issue of tax incidence.
Consider the market for gasoline. Suppose the market demand and supply curves are as given below. In each case, quantity refers to millions of litres of gasoline per month; price is the price per litre (in cents).
Demand: p = 80 - 5QD
Supply: p = 24 + 2QS
a. Plot the demand and supply curves on a scale diagram.
b. Compute the equilibrium price and quantity.
c. Now suppose the government imposes a tax of 14 cents per litre. Show how this affects the market equilibrium. What is the new "consumer price" and what is the new "producer price"?
d. Compute the total revenue raised by the gasoline tax. What share of this tax revenue is "paid" by consumers, and what share is "paid" by producers?