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1、Inmanycountries,petrolisamongthemostheavilytaxedgoods.Motoristshaveoftenexclaimed,"Ifthepetroltaxwereanyhigher,I'dtakethebus!"(a)Explainwhypetrolisheavilytaxed.[10](b)Examinetherelevanceofpriceelasticityofdemandandincomeelasticityofdemandforraisingtaxonpetrol.[15]Pa
2、rtAsimplyasksforrationaleofatax.Thegovernment'smicroeconomicsobjectivearetoachievei) socialefficiency,duetoeitherpresenceofexternalitiesormarketimperfectionsandii) equityorfairness.Basic CONTENT answers:Definetax.Explainhowataxworks.Marketfailure.Divergencebetweenp
3、rivateandsocialcosts.Key ANALYSIS answers:CommonAnswers:1)Toreducecongestion.Raisetheusercostofdrivingbytaxingpetrol.2)ToreduceairpollutionNot-so-commonanswers:Toraisetaxrevenue.3reasons:1)Toraisetaxrevenue,soastomeetexpensesinareassuchasprovisionofpublicgoods,meri
4、tgoods,etc.2)ProvidesubsidiestoprivatefirmstoengageinR&Deffortstoreducepollution.3)Raiserevenuetoreachouttolower-incomeandneedypartsoftheeconomy,fundsocialprogrammestopromoteequity.POINTTOREMEMBER:1.whenaquestioninvolvesthegovernment,thinkingofthemicroeconomicobject
5、iveswillguaranteeyoutokeepyouranswerasrelevantaspossible.2.Given10m,onaverage3willdo.SuggestedAnswersforPartB:Notethatinthispart,evaluationskillsisrequired,andisworth4m.So11leftfortheanalysis.Onaverage,5mforPEDandYEDEACH.Probablyonly1-2mforPEDcontentand3-4mforPEDana
6、lysis,sokeepthebasicdefinitionandexplanationofconceptsshort!~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Basic CONTENT answers:DefineandinterpretPriceElasticity(PED)andalsoIncomeElasticity(YED).Key ANALYSIS answers:Justifywhetherthedemandforpetrolispriceelasti
7、c,usingthedeterminantsofPED.ExplaintherelationbetweenpricechangesandPED<1situation.Establishtherelationshipbetweenhigherpetroltaxtotheobjectivesasexplainedinparta,USINGPEDastheonlyreasonforthelink!AndotherreasonisNOTallowed.Forexample:Asdemandisrelativelyprice-inela
8、stic,government’sattempttodiscouragedrivinginattempttodealwithnegativeexternalitiessuchaspollutionandcongestionwillexperiencelimitedsucces
