Each year, millions of people drive without auto insurance, despite a law requir

Question

Each year, millions of people drive without auto insurance, despite a law requiring that all drivers carry such insurance. Knowing this, law-abiding drivers might also choose to carry extra coverage to protect themselves in case they are hit by an uninsured motorist. This essentially penalizes drivers who obey the law, and many view it as unfair.

Suppose that someone proposes a gasoline tax of $2 per gallon to help pay for publicly provided automobile insurance. The graph below shows the demand and supply curves of the market for gasoline as well as the wedge that the tax creates. Use the graph to answer the following questions.

   How much is the total tax revenue? A.  $30 million B.  $50 million C.  $40 million D.  $20 million

Explanation / Answer

The tax revenue to the government is represented by Area A+C

Area of A+C=(3.5-1.5)*15=30

Tax revenue =$30 million.

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