ECON 1B03 Lecture Notes - Lecture 10: Deadweight Loss, Economic Surplus, Economic Equilibrium

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erincat447

10 Jun 2018

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Government Policies: Sales Tax Analysis

The Deadweight Loss of Taxation

- A tax reduces the quantity traded, increases the price consumers pay and decrease the price

suppliers receive compared to the non-tax equilibrium quantity, so we know there will be a

deadweight loss

- A tax on a good will reduce consumer surplus and producer surplus

- The goeret’s tax reeues are a eefit for the ad a eefit for the reipiets he the

government spends that revenue on social programs, so tax revenue doesn’t count as a welfare

loss

- consumers pay a higher price

- Firms end up with a lower price

- Producer surplus is everything under the price the producer ends up with

- Total tax revenue = B + D

- Before tax, consumers were getting A, B, C

- Before the tax producers were getting D, E, F

- After the tax, consumers get A. Producers get F. Government gets B + D and no one gets C and

E (DWL = C+ E)

Determinants of the DWL due to Tax

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ECON 1B03 Full Course Notes

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A tax reduces the quantity traded, increases the price consumers pay and decrease the price suppliers receive compared to the non-tax equilibrium quantity, so we know there will be a deadweight loss. A tax on a good will reduce consumer surplus and producer surplus. The go(cid:448)er(cid:374)(cid:373)e(cid:374)t"s tax re(cid:448)e(cid:374)ues are a (cid:271)e(cid:374)efit for the(cid:373) a(cid:374)d a (cid:271)e(cid:374)efit for the re(cid:272)ipie(cid:374)ts (cid:449)he(cid:374) the government spends that revenue on social programs, so tax revenue doesn"t count as a welfare loss consumers pay a higher price. Producer surplus is everything under the price the producer ends up with. Before tax, consumers were getting a, b, c. Before the tax producers were getting d, e, f. Producers get f. government gets b + d and no one gets c and. Always refer to a sketch when you want to calculate the dwl so you can see exactly what numbers you need.

Related Questions

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

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

Problem II: A competitive market is defined by the following demand and supply functions: P = 210 - 2Q and P = 30 + Q. a) Calculate total welfare on this market (5400) b) Calculate total welfare and the deadweight loss if a price floor of $80 is introduced by the government (5400, 0) c) Calculate consumer surplus, producer surplus, and the deadweight loss if a price floor of $110 is introduced by the government (2500, 2750, 150) d) Calculate total welfare and the deadweight loss if a price ceiling of $70 is introduced by the government (4800, 600) e) Calculate total welfare and the deadweight loss if a price ceiling of $100 is introduced by the government (5400, 0) f) Calculate total welfare and the deadweight loss if a per unit tax of $30 is introduced by the government (5250, 150) g) At this tax level, calculate the marginal effect of a tax increase on deadweight loss? (10)

burgundydinosaur823

ECON 1B03 Lecture Notes - Lecture 10: Deadweight Loss, Economic Surplus, Economic Equilibrium

ECON 1B03 Full Course Notes

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