Carbon tax Suppose the government imposes a carbon tax on oi

Carbon tax: Suppose the government imposes a carbon tax on oil production. Will this affect the supply or the demand for gasoline? Why? Which determinant of demand or supply is being affected?

Solution

Imposition of tax on production of oil will increase the cost of production, which in turn will reduce the profit of the sellers.Therefore, they will reduce the supply of gasolin in the market. As a result,the supply curve of oil will shift lefteardand the equilibrium price will increase and equilibrium quantity will decrease.

Here, the supply determinant \"Cost of Production\" is affected.