An elected representative spoke out against increasing the tax on oil producers, arguing that any higher tax "will end up on the backs of consumers. You can't sock it to the big oil companies.. they'll just pass (all of it) along to the consumers." What was the representative implying about the price elasticity of demand for oil? Does avaliable evidence support his claim? If the representative were correct and if a new tax were imposed, how much less oil would be demanded?
2007-04-04 14:12:45 · 2 answers · asked by Shasta T 1 in Social Science ➔ Economics
Yes, he is correct. Oil is price elastic. More so in the short run than the long run, but you can't tell me even in the long run that people give up their SUV's and take a bus to work just because gas is 50 cents higher.
In the scenarios the demand of oil would not drop by much. It would drop by less than the % change in price.
2007-04-04 14:42:14 · answer #1 · answered by JuanB 7 · 0⤊ 0⤋
If oil was elastic then demand would decrease as tax passed on to the consumers would hike the price; but, oil is not elastic. Typically, necessity goods are elastic only if they have substitutes, chips have substitutes (fruits, candy) and prove to be elastic if price changes; but oil on the other hand does not prove to be elastic and is, by this rule, inelastic. Oil does not have substitutes so people still buy it just the same. That's why it has so many strong implications in our economy. If it gets expensive it is an unavoidable pain in the butt! It's just the rule, there isn't much evidence beyond the examples stated above.
2007-04-04 21:58:41 · answer #2 · answered by Anonymous · 0⤊ 0⤋