Question 10 (7 points) a. Suppose a tax is applied on each unit of oil to take account of the environmental damages caused by oil. The substitute causes no environmental damage. Describe the impact of the tax by answering the following questions. i. What is the impact on the initial price, $P_0$ and quantity, $q_0$. Explain. (2 marks) ii. How will the timing of the switch to the substitute be affected? Explain. (3 marks) iii. What happens to the total quantity extracted? Explain. (2 marks)
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The tax on each unit of oil will increase the cost of production for oil producers. As a result, the price of oil, Po, will increase. This is because the tax is passed on to consumers in the form of higher prices. The quantity of oil, qo, will decrease as Show more…
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Many changes are affecting the market for oil. Predict how each of the following events will affect the equilibrium price and quantity in the market for oil. In each case, state how the event will affect the supply and demand diagram. Create a sketch of the diagram if necessary. a. Cars are becoming more fuel efficient, and therefore get more miles to the gallon. b. The winter is exceptionally cold. c. A major discovery of new oil is made off the coast of Norway. d. The economies of some major oil-using nations, like Japan, slow down. e. A war in the Middle East disrupts oil-pumping schedules. f. Landlords install additional insulation in buildings. g. The price of solar energy falls dramatically. h. Chemical companies invent a new, popular kind of plastic made from oil.
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