Question: Lots has been written about whether or not a "gas tax holiday" will or will not lower the price of gas to the final consumers/demanders who buy gas to drive their cars.

Assume the automobile gasoline market is perfectly competitive and that, at the industry level, there are no EXTERNAL economies or diseconomies. Assume that there is currently a twenty cents per gallon tax on gasoline. Assume the policy under consideration is to lower the tax on gasoline to zero.

a. In the very short run (as in the article posted on the Discussion Board web page by Paul Krugman - your text book author and available at http://krugman.blogs.nytimes.com/2008/04/29/gas-tax-follies/ ) use demand and supply to demonstrate that the final demand price will be unaffected by this tax holiday. Also show how the holiday would benefit suppliers of gasoline.

b. How might you re-do your demand and supply diagram if we took a more long run view and permanently removed the $.20 per gallon gasoline tax?