Elasticity

Demand for petrol is inelastic : petrol has no close substitute. Motorists can reduce their usage of their car, and perhaps drive fewer kilometres, but they can not fill their ''tank'' with water!

Motorists can convert their cars to run on liquified petroleum gas (which is considerably cheaper than petrol), but the conversion cost is high. Petrol does have a substitute; but LPG is not a close substitute.

Governments like to tax goods with inelastic demand curves. The diagram illustrates the effect of a 10 cents per litre tax; a shift of the Supply Curve from S to S₁. Petrol station owners will notice a small fall in sales; but the effect on their profits is small. Governments do not like to be accused of driving small business out of business!

Other goods with high levels of taxation include alcohol and cigarettes: both very inelastic.