Elasticity and Resource Markets

Please respond to both questions with 3-5 paragraphs per question.


1. When a government wants to increase tax revenue, they will often increase the sales tax on gasoline. Using price elasticity of demand, explain why the tax would be placed on gasoline rather than, say, yachts. What might be the long run effect of raising the price of gas? In other words, who is harmed by the tax? Who benefits from such a tax? Are low-income households disproportionately harmed as compared to high-income households? Why or why not?



2. Your decision to pursue a higher-level degree is based on investment in human capital. What are the marginal costs and benefits of pursuing additional education and the inherent risks associated with this decision?