Answer to Question #140428 in Microeconomics for Annie

Question

some govts require special blends of petrol to reduce emissions,which cost more to produce Occasional disruptions in the supply of petrol from a domestic oil refinery due to for e.g, an industrial disaster will lead to temporary large price increases if imports of more polluting petrol from less environment-friendly refinaries are not allowed perhaps due to opposition from domestic refiness(with large sunk investments)& environmentalists.However, to minimize fluctuations in consumer prices, the domestic govt. might instead impose a tax on imports of standard petrol.The tax could be set at high enough level that in normal economic times standard petrol would not be sold but when disasters trigger a large shift in the supply of domestic petrol,firms could profitably import standard petrol and keep the domestic consumer price from rising more than the amount of the tax Suppose the required tax rate is 15 cents per liter on imports of standard perol.Use a diagram to evaluate the tax alternative.

Answer 1

If the required tax rate is 15 cents per liter on imports of standard petrol, then the foreign standard petrol will be imported after the price increases by more than by 15 cents per liter.