A country currently imports Q = 5700 million barrels of crude oil per year and considers putting a tax 1 = €30 per barre

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A Country Currently Imports Q 5700 Million Barrels Of Crude Oil Per Year And Considers Putting A Tax 1 30 Per Barre 1 (80.74 KiB) Viewed 39 times

A country currently imports Q = 5700 million barrels of crude oil per year and considers putting a tax 1 = €30 per barrel to correct for the climate externalities. The world price of crude oil is currently P = €50 per barrel. Assuming linear demand schedule, economist estimate the price elasticity of demand to be -0.1 at the current equilibrium. Hint: In this problem, we continue evaluating the market impacts of Pigouvian taxation. The only difference to the case in the lectures is that supply is now flat: consumers can buy as much as they want with the world price 50 €/barrel. Note that you only need the equilibrium quantity Q = 5700 and price P = 50 (with appropriate units), and the price elasticity of demand to do the analysis. To make headway, note that the price elasticity of demand is -.1 = AQ P ΔΡΟ where AQ indicates change in demand. This is all you need! Answers in millions of euro unless otherwise indicated. Use positive numbers throughout (e.g. for a loss). a) What is the new demand new in millions of barrels? b) What is the tax revenue for the government? c) How large is the deadweight loss? d) What is the total reduction of the consumer surplus? e) Assume that the tax reflects the true cost of externality. How much is the externality reduced? f) How large is the total improvement in efficiency?