Answer to Question #49492 in Economics of Enterprise for Adam Mohamed Ali

Question

Analyse the impact of gasoline tax on gasoline prices and output?

Answer 1

Impact of gasoline tax on gasoline prices and output may be different.
If gasoline taxes are set based only on their effects on gasoline use, then the best governmental policy would be to set the gas tax equal to marginal damage: the value of all of the negative externalities that result from using a gallon of gasoline, including pollution, accidents, noise, and traffic congestion. Since these costs are imposed on others, people don't have enough incentive to conserve gas. Taxing gasoline forces drivers to take that cost into account when making driving decisions. If the gas tax equals marginal damage, then the cost of gasoline to the driver is the same as the cost to society, thus providing the proper incentives.