Suppose gasoline stations operate with identical costs in a perfectly competitive industry. In each of the following cases, explain what happens to an individual gasoline station and what happens to the overall quantity of gasoline sold in the short and long run. Assume that labor is the only variable input in the short run. a. Last year’s tax returns from gasoline station owners show unusually high income for these owners because of the upward trend in prices this past year. So Congress passes a one-time "profits tax" based on these unusually high incomes last year.
b. Continue with part (a). After the imposition of the "profits tax" from part (a), Congress has to decide what to do with the revenues. The Texas Congressional delegation persuades the government that running a gasoline station is patriotic but difficult work – and that the Congress should put all the revenues from the "profits tax" into a trust fund which will be used to finance annual Christmas gifts in the form of a $10,000 check for all gasoline station owners from now on.
c. Moved by a Hollywood movie on global warming, a teary-eyed senator persuades Congress to impose a $2 per gallon tax on all gasoline sold at the pump.
d. After the industry settles into its new long run equilibrium (following the tax increase from (c)), the Congress decides to help out the gas station owners once more by subsidizing their equipment purchases through a tax credit – thereby lowering the rental rate they have to pay on their equipment. (Assume equipment is fixed in the short run, variable in the long run.)
e. True or False: Since the short run marginal cost curve measures only costs associated with variable inputs (like labor) and not with fixed inputs (like capital), the short run marginal cost curve in the new long run equilibrium (following the policy in part (d)) is the same as the short run marginal cost curve in the old equilibrium (before the policy in part (d)). Explain.