Evaluate whether a tax on petrol in the UK would reduce the demand for cars.

A specific tax is a fixed amount levied on purchases of a commodity. These are often used by the Government to reduce the quantity demanded of goods that produce a negative externality, which means that the consumption of a good has negative consequences for third parties that aren't taken into account by the price mechanism. Cars can be considered to have a negative externality in consumption due to the environmental affects such as pollution. Petrol and cars are complement goods, which means that an increase in the price of petrol would lead to a decrease in the quantity of cars demanded.A tax on petrol would shift the supply curve upwards by the value of the tax, as the effect is to reduce the quantity that firms are prepared to supply at any given price. This would lead to an increase in the price of petrol and as such, people would be inclined to substitute car travel with other goods such as public transport. Furthermore, the tax revenue collected from the tax could be hypothecated such that it is spent improving public transport, thereby increasing the overall effect of the tax. However, the effect of the tax is dependent on the price elasticity of demand, which means that if petrol is highly price inelastic, behaviour will remain unchanged. Also there may be a regressive effect as lower income households will be affected to a larger extent, which would worsen inequalities.