MICROECONOMIC POLICY MINI CASE 2

2.1 OPEC v. Governments

Many governments, especially those in the Western Europe, target

gasoline for high taxes. For example, more than 50% of the gasoline
prices in Britain, France and Germany are government taxes. Gasoline
taxes are designed to reduce congestion and pollution; most
importantly, they bring governments tax revenue. At the time of
writing, there has been a significant surge in crude oil prices, which
subsequently lead to high gasoline prices around the world. The
organization for petroleum exporting countries (OPEC) has agreed to
increase supply, but also urged governments around the world to
reduce gasoline taxes. In face of widespread protests by consumers, the
French government has succumbed to cut gasoline tax for powerful
groups such as lorry drivers and farmers. Italy and the Netherlands
have promised to offer similar tax cuts. Other European governments
are trying to hold firm to consumers’ request for tax cuts. (“Burning
Issue.” Economist, September 23, 2000, page 18. “No Easy Exit.”
Economist, September 23, 2000, pages 68-69.)

a. Illustrate how a supply increase of gasoline, say due to higher

utilization of existing facilities by the OPEC, would affect the buyer and
seller surpluses.

b. Show how a cut in gasoline tax would affect the buyer and seller
surpluses, and explain why the governments are reluctant to offer tax
cuts.