PT2.S1.Q05 - a gas tax of one cent

Seriousbird

I got this question correct, but I wanted to review it because I was really confused with the answer choices.

So, it's a flaw in the reasoning. My whole thought process with the stimulus is/was that the flaw is you cannot assume that since a tax of 1% per gallon would raise one billion dollars/year at consumption rates, a tax of 50% per gallon would yield 50 billion dollars per year. Just because the tax is a certain percentage/dollars does not mean that amount would be doubled. Am I correct in thinking about the flaw this way? I took micro and macroeconomics a really long time so other than the law of supply and demand I don't really remember much for example elasticity.. I know revenue is cost-profit or is it the other way around. I'm really confused so if someone could help me out, I would be most appreciative!

My reasoning is below:

A) the data is not irrelevant, in fact, I would say it is relevant to discussing the flaw in the reasoning.
I was thinking about this one for a minute, but then I thought the author is not discussing current consumption figures but rather hypothetical/future consumption figures according to tax policies.
C) I chose this because I thought you cannot assume since a tax of one percent per gallon yields one billion dollars that a tax of fifty percent will yield fifty billion dollars.
D) I was considering this also, but then I couldn't pinpoint the cause and effect, all I could think of was there are two potential situations and we have no idea of the second one is really possible or not.
E) This one I was totally lost on because there is no discussion of morality, it's purely economic reasoning. I ignored this answer choice and focused on the others.

PLEASE HELP!!!!! thanks in advance!

Sami

I think the crux of the question is that he is at the first half of question assuming the the demand will remain the same. They can solve the deficit problem, by raising gas tax, and they would get a lot more revenue. So he is assuming people will still buy relatively the same amount. Then in the second part he is saying demand will drop, so less environmental problems. So if the demand will drop by raising tax then would we still get the higher revenue? probably not. So he is making incompatible assumptions. 1st. one demand will stay the same, so higher tax, more revenue. 2. Demand will drop with higher tax, solves environmental problems.

"answer choice C": gets at that incompatible assumptions about demand.