What are the consequences of imposing a tax on oil

Reference no: EM131431246

Consider a two-period model, in which oil (still in inelastic supply) can be used either this period or next period. In equilibrium, the price next period must by higher than the price this period, if an owner of oil is to be willing not to sell it this period. Explain why if the interest rate is 10 percent, the price must be 10 percent higher. (The principle that price must rise at the rate of interest is called Hotelling's principle. After Harold Hotelling, a distinguished professor of statistics at Columbia and North Carolina State, who first enunciated it almost three-quarters of a century ago.) What are the consequences of imposing a tax on oil at the same rate in both periods?

Reference no: EM131431246

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