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    Impact of Taxation on Pricing

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    To reduce imports of foreign oil, it has been proposed that the United States impose a substantial tax on gasoline. However, it is well known that the short-run elasticity of demand for gasoline is very low. What will happen to the total quantity of gasoline sold if there is an additional gasoline tax? Would the tax be effective in reducing gasoline imports? Would the tax be effective in raising tax dollars for the government?

    Alternatively, suppose that gasoline substitutes such as gasohol become widely available, and the tax is applied only to gasoline. How would this affect the elasticity of demand for gasoline? Would the tax be more or less effective now in reducing imports?

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    Elasticity is the proportional change in one variable relative to the proportion change in another variable. The concept of elasticity can be used whenever there is a cause and effect relationship. The causal variable is often called the independent variable, while the affected variable is called the dependent variable.

    In economics, the price elasticity of demand (PED) is an elasticity that measures the responsiveness of ...

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