A controversial issue in managing climate change is the effect of taxes on gasoline. Higher taxes would reduce the after-tax price received by gasoline producers. The price elasticity of the supply of gasoline has been estimated to be 2.0. a. Explain why the price elasticity of supply is positive. b. Suppose that a tax on gasoline reduces the after-tax price of gasoline by 5%. By how much would suppliers reduce gasoline production? c. Compare the effect of the tax on gasoline in the short vis-à-vis long run.

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