One of the first headlines on my iGoogle page inspired a small set of review questions for econ 101. They're posted below the fold; if you you have any comments or suggestions, please let me know. Otherwise, feel free to use and abuse them as you see fit.

The Federal Government charges 18.4 cents per gallon in tax on gasoline. Presumptive Republican Presidential nominee John McCain has suggested that the tax be suspended between Memorial Day and Labor Day, according to an April 16, 2008 article in the San Jose Mercury News. The following questions ask you to analyze this policy in light of what we have learned in class.

1. A relatively elastic demand curve:
a. Assume the tax is to be paid by consumers. Use an appropriate diagram to show how the burden of the tax will be distributed assuming that the supply curve is less elastic than the demand curve.
b. Assume the tax is to be paid by producers. Use an appropriate diagram to show how the burden of the tax will be distributed assuming that the supply curve is less elastic than the demand curve.
c. Under which scenario is deadweight loss largest?

2. A relatively elastic supply curve:
a. Assume the tax is to be paid by consumers. Use an appropriate diagram to show how the burden of the tax will be distributed assuming that the supply curve is more elastic than the demand curve.
b. Assume the tax is to be paid by producers. Use an appropriate diagram to show how the burden of the tax will be distributed assuming that the supply curve is more elastic than the demand curve.
c. Under which scenario is deadweight loss largest?

3. Externalities: Suppose that the marginal external cost of every gallon of gas consumed is precisely 18.4 cents per gallon.
a. Use an appropriate diagram to explain whether the federal gas tax increases or reduces social efficiency.
b. Would elimination of the tax reduce social efficiency? Explain your answer using an appropriate diagram.
c. Under what conditions would the tax be unnecessary, according to the Coase Theorem?

4. The Theory of Consumer Choice: Stewie spends his income on two goods: gallons of gasoline and “all other goods.”
a. Draw Stewie’s indifference curves. Can they cross? Explain why or why not.
b. Draw Stewie’s budget constraint and indicate his utility-maximizing choice of gas and “all other goods” before a tax on gas is imposed.
c. Use an appropriate diagram to show how the imposition of a tax on gas affects Stewie’s choices. Clearly label the income and substitution effects.

5. The Theory of Consumer Choice, Again: Assume that the tax is in place. In light of your answers to the questions above, which policy would be more advantageous: reducing the gasoline tax, or giving a general lump-sum tax rebate? Use the theory of externalities and the theory of consumer choice to support your answer.

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