In 1980, Washington, D.C., city official, hard-pressed for tax revenue

Question

This passage is an excerpt from Microeconomics Theory and Applications, 9th Edition, by Edgar K. Browning and Mark A. Zupan (Wiley):

In 1980, Washington, D.C., city officials, hard-pressed for tax revenues, levied a 6 percent tax on the sale of gasoline. As a first approximation (and a reasonable one, it turns out), this tax could be expected to increase the price of gasoline by 6 percent. The elasticity of demand is a key factor in the consequences of this action, because the more sharply the sales of gasoline fall, the less tax revenue the city will raise. Presumably, city officials hoped that gasoline sales would be largely unaﬀected by the higher price. Within a few months, however, the amount of gasoline sold had fallen by 33 percent.1 A 6 percent price increase producing a 33 percent quantity reduction means the price elasticity was about 5.5.

The sharp sales drop meant that tax revenue was not increased. Further indications were that when consumers had fully adjusted to the tax, tax revenues would actually decrease. (There had been a 10 cent per gallon tax before the 6 percent tax was added, so although the 6 percent levy was raising revenue, the gain was largely oﬀset by the loss in revenue from the initial 10 cent tax following the reduction in sales.) This was not a general increase in gasoline prices but a rise only within the D.C. city limits. Gasoline sold in the District of Columbia is a narrowly defined product that has good substitutes — gasoline sold in nearby Virginia and Maryland. Higher gasoline prices in the District of Columbia, when the prices charged in Virginia and Maryland are unchanged, indicate high elasticity in the market.

No economist would be surprised at the results of this tax, but apparently, city officials were. Observed one city councilman: “We think of ourselves here in the District as an island to ourselves. But we’ve got to realize that we’re not. We’ve got to realize that Maryland and Virginia is right out there, and there’s nothing to stop people from crossing over the line.” The 6 percent gasoline tax was repealed five months after it was levied.    1 
 1. The author is primarily concerned with doing which of the following?

(A) Arguing for increased gas taxes
(B) Arguing against increased gas taxes
(C) Ridiculing all local government officials
(D) Advancing a particular ideology
(E) Explaining certain principles of supply and demand

2 
 2. It can be inferred from the passage that elasticity in the last sentence of the second paragraph refers to

(A) fluctuations in the price of gasoline in Washington, D.C.
(B) fluctuations in the price of gasoline in Virginia and Maryland
(C) changes in the amount of tax collected at 6 percent
(D) changes in the number of vehicles in the region
(E) fluctuations in the demand for gasoline sold in Washington, D.C.

3 
 3. For which of the following reasons does the second paragraph of the passage mention the original gas tax of 10 cents per gallon?

(A) To show that Washington, D.C., residents were already overtaxed
(B) To distinguish between a straight 10 cent per gallon tax and a percent tax
(C) To explain why residents should not be subjected to different kinds of taxes
(D) To contrast the 10 cent tax that was included in the pump price and the 6 percent sales tax that was added after the sale
(E) To show that with a sufficient decrease in gasoline sales, the city would actually lose money despite the higher tax

4 
 4. The passage suggests that a reason the tax increase failed to raise tax revenues in the District of Columbia is that

(A) District of Columbia consumers decreased the amount of fuel they purchased and limited their overall vehicle usage
(B) the amount of gas consumed by District of Columbia residents in their commute to nearby states was sufficiently negligible to justify purchasing fuel outside the city limits
(C) consumers in the District of Columbia were upset that city council members would decrease fuel taxes to increase tax revenues
(D) as a result of the tax increase, residents of Virginia and Maryland discontinued making gas purchases in the District of Columbia
(E) District of Columbia city council members failed to convince legislators in nearby states to increase their fuel taxes

RC Butler 2022  -  Practice Two RC Passages Everyday.   
Passage # 189 Date: 11-May-2022
 This question is a part of RC Butler 2022 .  Click here for Details

VIGHNESHKAMATH · Answer

In my opinion, answer to all these four questions is EEEE. Waiting for official answers.

Regards
Vighnesh

GAngstA · Answer

question 4, i got right ans but i have doubt on option A?
 please explain me why option A is not qualified as ans.

Sajjad1994 · Answer

Official Explanation

4. The passage suggests that a reason the tax increase failed to raise tax revenues in the District of Columbia is that

Explanation

To answer this inference question, note that the tax increase was implemented with the intent to increase tax revenue. The passage states that tax revenues didn’t increase essentially because city officials didn’t account for the elasticity in the market. Consumers found equal, less expensive substitutes in nearby gas stations outside the D.C. city limits.

Eliminate answer choices that are blatantly wrong.  Choice (C)  presents information that’s contrary to the details of the passage. City officials didn’t decrease fuel taxes; they increased them. You can easily narrow your choices to four.

Choice (A)  provides an explanation for the decreased revenues. If consumers limited their overall gas consumption, tax revenues would fall. This isn’t the reason the author suggests, however. The passage doesn’t say that D.C. residents stopped buying fuel altogether. It suggests that they stopped buying fuel in D.C. and started buying it in Virginia and Maryland. Eliminate Choice (A).

Just because an answer choice makes logical sense doesn’t mean it’s correct. The answer has to make sense given the information in the passage.

You can also cross off  Choices (D)  and  (E)  from the list. Both answers require you to infer information that’s beyond the scope of the passage. You don’t know anything about the fuel-buying habits of Virginia and Maryland residents, nor can you imagine that D.C. officials tried to work with officials in neighboring states. In fact, the passage states that D.C. officials were surprised that their constituents bought gas elsewhere, so it’s unlikely that they had the forethought to negotiate with other governments.

The remaining answer is  Choice (B).  If D.C. residents went outside of the city limits to purchase fuel, the overall cost of the trip must have been more cost effective than buying gas within the city. Otherwise, they would have continued to purchase fuel in D.C.

Answer: B

VerbalBot · Answer

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In 1980, Washington, D.C., city official, hard-pressed for tax revenue

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In 1980, Washington, D.C., city official, hard-pressed for tax revenue

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