Question

In the case of the gasoline tax,what would happen if the rebate to the consumers were based on their original consumption of gasoline, x, rather than on their final consumption of gasoline, x'?

Answer 1

Answer:

Even though the money comes back to consumers in the form of a rebate, the reason consumption falls from A to C is because the income elasticity of demand for gasoline is relatively low (around . 3 by some estimates) so that the substitution effect dominates the income effect.

Explanation:

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