Question

The government imposes two types of taxes on natural gas producers: a local impart fee, which is a flat tax paid per well drilled, and a severance tax, which is based on the market value of the total volume of gas extracted, $v$. If a producer's total bill for one well is $T=0.004v+50,000$, then the value $0.004$ represents

• A. The local impart fee
• B. The market value of the gas extracted
• C. The total tax bill minus the local impact fee
• D. The amount of the severance tax as a percentage

Answer 1

The correct option is D The amount of the severance tax as a percentage

$T=0.004v+50000$

In the above equation,

$T=$ total tax bill

$v=$ market value of the total volume of gas extracted

$0.004$ is the amount of severance tax as a percentage

$50000$ is flat tax paid per well drilled

Hence, $0.004$ represents the amount of severance tax as a percentage.