ECON 102 Lecture Notes - Lecture 8: Lead, Laffer Curve, Deadweight Loss

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peachkoala371

21 Mar 2019

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Tax - drives a wedge between the price buyers pay and the price sellers receive. Raises the price buyers pay and lowers the price sellers receive. We apply welfare economics to measure the gains and losses from a tax. We determine consumer surplus, producers surplus, tax revenue, and total surplus with and without the tax. Tax revenue can fund beneficial services so we include it in total surplus. Total surplus = a + b + d + f. Tax reduces total surplus by c + e. C + e is called the deadweight loss (dwl. Fall in total surplus that results from a market distortion such as tax. Because of the tax, the units between qt and qe are not sold. Value of these units to buyers is greater than the cost of producing them, so the tax prevents some mutually beneficial trades.

Related Questions

1) Taxing a monopoly (20 Points) Suppose that a monopolist sells a product to consumers with an aggregate demand that is downward sloping in quantity, D(Q) = 200 â 2Q. The total cost of producing Q units is C(Q) = 20Q + 2Q2 .

a) Identify the unregulated equilibrium (P â , Qâ )

b) What are the consumer and producer surpluses (CS and PS) and total welfare (W) at this equilibrium?

c) Suppose that a specific tax of Ï = 20 is imposed on each unit. i. What price-quantity pair (P 1 , Q1 ) would we expect? ii. What are CS, PS, tax revenue (T), and W? iii. What is deadweight loss?

d) Instead of a specific tax, an ad valorem tax, Î± = 16 is imposed i. What price-quantity pair (P 2 , Q2 ) would we expect? ii. What are CS, PS, T, and W? iii. What is deadweight loss?

e) Welfare distribution i. Which scenario results in the highest producer surplus? ii. Which scenario results in the greatest gains for consumers, assuming that all tax revenues are perfectly redistributed to consumers only.

scarletbadger532

Consider a market where demand is: P = 6 - Q and supply is S: P = Q.

1)Equilibrium quantity Qe is

a)2

b)3

c)4

d)5

2)Equilibrium price Pe is

a)$2

b)$3

c)$4

d)$5

3)Consumer surplus CS is

a)$0.5

b)$4.5

c)$12.5

d)$16.5

4)Producer surplus PS is

a)$0.5

b)$4.5

c)$12.5

d)$16.5

5)Total surplus TS is

a)$5

b)$7

c)$8

d)$9

6)Construct a budget-neutral subsidy in the above market.

Quantity Qâ is

a)2

b)3

c)4

d)5

7)Post-subsidy producer price Pp is

a)$2

b)$3

c)$4

d)$5

8)Consumer surplus CS is

a)$0.5

b)$4.5

c)$12.5

d)$16.5

9)Producer surplus PS is

a)$0.5

b)$4.5

c)$12.5

d)$16.5

10)Total surplus TS is (do not forget to account for the subsidy expenditure SE)

a)$5

b)$7

c)$8

d)$9

champagnecod279

The market for packets of cigarettes has been described by the following supply and demand functions:

Supply: P = 10 + 4Q Demand: P = 100 - 5Q where P is the price in dollars and Q is the quantity of packets of cigarettes per month (in thousands).

Part A) Construct a graph of supply and demand for this market showing all intercepts. What are the equilibrium prices and quantities? Show these on your graph.

Part B) At the market equilibrium price, what would be the total monthly revenue?

Part C) Calculate consumer surplus at the market equilibrium and indicate this surplus as an area on your diagram.

Part D) Calculate producer surplus at the market equilibrium and indicate this surplus as an area on your diagram.

Part E) Assume that a per-unit tax of $9.00 per packet of cigarettes is imposed by the government on the suppliers of cigarettes. Depict this on your demand and supply diagram. (Hint: the new tax inclusive supply function will be: P = 19 + 4Q). What is the new market equilibrium quantity? What price will consumers now pay and what price will suppliers now receive?

Part F) How much is the government revenue from the tax on suppliers?

Part G) Calculate consumer surplus and producer surplus after the imposition of the tax and any deadweight loss associated with the tax. Indicate these surplus and tax revenue areas on your diagram. Explain what the deadweight loss represents.

Part H) Now assume that instead of imposing a per-unit tax of $9.00 per pack on the suppliers of cigarettes the government decides to apply the same per-unit tax of $9.00 on consumers. Depict this on your demand and supply diagram. (Hint: the new tax inclusive demand function will be: P = 91 - 5Q) What is the new market equilibrium quantity? What price will consumers now pay and what price will suppliers now receive? (5 marks)

Part I) How much is the government revenue from the tax on consumers? (1 mark)

Part J) Who bears the greatest burden of the tax in each case, producers or consumers? Does your answer depend on whether the tax is levied on producers or consumers?

I am really having difficulty understanding Part J - can that please be answered with some detail?

carminewildebeest911

ECON 102 Lecture Notes - Lecture 8: Lead, Laffer Curve, Deadweight Loss

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