ECN E102 Lecture Notes - Lecture 15: Economic Equilibrium, Market Distortion, Deadweight Loss

6 views2 pages

rubyporpoise450

9 Dec 2020

School

Department

Course

Professor

For unlimited access to Class Notes, a Class+ subscription is required.

Document Summary

Recall: it doesn"t matter whether a tax on a good is levied on buyers or sellers of the good. The tax places a wedge between the price buyers pay and the price sellers receive . A tax on a good causes the size of the market for the good to shrink (quantity sold falls) The government gets total tax revenue t x q (t = size of the tax and q = quantity. Uses this tax revenue to provide services such as roads, police and public sold) education. To analyze how taxes affect economic well-being, we use tax revenue to measure the government"s benefit from the tax this benefit accrues not to government but to those on whom the revenue is spent. Tax revenue is represented by the rectangle between the supply and demand curves. Consumer surplus is the area between the demand curve and the price. Producer surplus is the area between the supply curve and the price.

Related Questions

7. Effect of a tax on buyers and sellers

The following graph shows the daily market for wine. Suppose the government institutes a tax of $23.20 per bottle. This places a wedge between the price buyers pay and the price sellers receive.

Fill in the following table with the quantity sold, the price buyers pay, and the price sellers receive before and after the tax.

Quantity(bottles of wine) Price buyers pay(Dollars per bottle) Price sellers receive(Dollars per bottle)

Before tax

After tax

Using the data entered in the previous table, calculate the tax burden that falls on buyers and on sellers, respectively, and calculate the price elasticity of demand and supply over the relevant ranges using the midpoint method. enter your results in the following table.

Tax burden(Dollars per bottle) Elasticity

Buyers

Sellers

The burden of the tax falls more heavily on the ..........elastic side of the market.

champagnehippopotamus285

Suppose that a market is described by the following supply and demand equations:

QS= 2P

QD = 300P

a. Solve for the equilibrium price and the equilibrium quantity.

b. Suppose that a tax of T is placed on buyers so the new demand equation is QD = 300 (PT). Solve for the new equilibrium. What happens to the price received by sellers, the price paid by buyers, and the quantity sold?

c. Tax revenue is T×Q. Use your answer to part (b) to solve for tax revenue as a function of T.
d. The deadweight loss of a tax is the area of the triangle between the supply and demand curves. Recalling that the area of a triangle is , solve for deadweight loss as a function of T.

(Hint: Looking sideways, the base of the deadweight loss triangle is T, and the height is the difference between the quantity sold with the tax and the quantity sold without the tax.)

yellowmule81

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

ECN E102 Lecture Notes - Lecture 15: Economic Equilibrium, Market Distortion, Deadweight Loss

Document Summary

Get access

Related Documents

ECN E102 Lecture Notes - Lecture 14: Economic Equilibrium, Perfect Competition, Invisible Hand

ECN E102 Lecture Notes - Lecture 12: Demand Curve, Economic Surplus, Marginal Utility

ECN E102 Lecture Notes - Lecture 17: Oc Transpo, Social Cost, Demand Curve

Related Questions