Which of the following is most likely to occur as a result of an increase in the excise tax on gasoline?

• A. The equilibrium price paid by consumers increases, and the quantity of gasoline sold decreases.
• B. The equilibrium price paid by consumers remains unchanged, but the quantity of gasoline sold decreases.
• C. The equilibrium price received by producers increases, and the quantity of gasoline sold remains unchanged.
• D. The equilibrium price paid by consumers decreases, and the quantity of gasoline sold increases.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the concept of an excise tax. An excise tax is a per-unit tax imposed on the sale of a specific good, such as gasoline. This tax effectively increases the cost of supplying the good.
2. Step 2: Analyze how the excise tax affects the supply curve. Since the tax increases the cost for producers, the supply curve shifts vertically upward by the amount of the tax, meaning at every quantity, the price producers require is higher by the tax amount.
3. Step 3: Determine the new equilibrium by finding the intersection of the demand curve and the new supply curve (which includes the tax). This new equilibrium will have a higher price paid by consumers and a lower quantity sold compared to the original equilibrium.
4. Step 4: Recognize that the price received by producers after paying the tax is the price paid by consumers minus the tax. Therefore, producers receive less per unit than before the tax was imposed.
5. Step 5: Conclude that the typical outcome of an increase in excise tax is an increase in the equilibrium price paid by consumers and a decrease in the quantity sold, which matches the first option in the problem.