How does the price elasticity of demand for gasoline impact the effectiveness of taxes on gasoline aimed at correcting a negative externality?

Elasticity, to a great extent, determines the effectiveness of a tax policy by determining the tax incidence. A tax incidence describes the division of a tax burden between different shareholders such as buyers and sellers. If gasoline has an elastic demand, it implies that a slight change in its price leads to a significant difference in the quantity demanded. Contrary, if it has an inelastic demand, a change in the price level leads to a low or no change in the amount purchased. A negative externality is a cost that is paid by a third party to an economic transaction such as pollution. If gasoline has an inelastic demand, the burden of a tax levy meant to correct a negative externality is paid by the buyers rendering the policy ineffective and further reducing consumer surplus.

On the other hand, if gasoline has an elastic price demand, the burden of a tax levy is borne by the producer. Therefore a policy to correct a negative externality is effective. If the producer were to shift the tax burden to the buyer, the quantity demanded would significantly reduce.