Reference no: EM132491857

Who Pays Higher Gasoline Taxes?

Gasoline taxes are paid by sellers from the revenues they earn from their total sales. Thus to receive the same effective price for selling a given quantity of gasoline, a gasoline producer must charge an actual price that is higher by exactly the amount of the tax. Sellers supply a given quantity of gasoline, but at a price that is higher by the amount of the tax that they have to pay to the government.

Who truly pays the tax depends on the price elasticity of demand. The more inelastic is demand, the greater is the portion of the tax paid by consumers. Thus if the demand for gasoline was perfectly inelastic, the entire burden of the tax would fall on buyers. If demand was perfectly elastic, the entire burden would fall on sellers. Estimates of the price elasticity of demand for gasoline indicate values between 0.2 and 0.5. Based on the information in this example, if excise taxes increased by 10 percent, by what percentages may desired gasoline purchases decrease?