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EC120 Study Guide - Final Guide: Market Distortion, Black Market, Dwls

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School
WLU
Department
Economics
Course
EC120
Professor
Ken Jackson

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EC120 Full Course Notes
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EC120 Full Course Notes
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Document Summary

A 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 reduces the quantity bought and sold. These effects are the same whether the tax is imposed on buyers or sellers, we do not make the distinction in this chapter. Deadweight loss of tax: the fall in total surplus that results from a market distortion, such as a tax. Turns out it depends on the price elasticity"s of supply and demand. Recall: the price elasticity of demand (or supply) measures how much qd changes when p changes. When supply is inelastic, it"s harder for firms to leave the market when the tax reduces ps. So the tax only reduces q a little, and dwl is small. The more elastic the supply, the easier for firms to leave the market when the tax reduces ps.

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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.

Last year, Berkeley, CA passed a tax on yoga classes of $4 per yoga class. Suppose that the pre-taxdemand for yoga classes is QD = 2000 – 100P, and that the pre-tax supply of yoga classes is QS = 300P –200.
(a) Calculate the initial equilibrium price and quantity.

(b) Calculate the elasticity of demand (ED) and elasticity of supply (ES) using calculus at the initialequilibrium price and quantity from Part (a).

(c) Use your answer from Part (b) to calculate the tax borne by consumers, as a percentage of the overalltax.

(d) Use your answer from Part (b) to calculate the tax borne by firms, as a percentage of the overall tax.

(e) Determine the price that buyers will pay for yoga classes after the tax (PB). Determine the price thatfirms will receive for yoga classes after the tax (PS).

(f) Calculate the deadweight loss (DWL) associated with this tax.

Please explain/prove your answers. Are the following statements true or false?

A. A tax on a market with elastic demand and elastic supply will shrink the market more than a tax on a market with inelastic demand and inelastic supply will shrink the market.

B. If the government places a $2 tax in the market, the seller bears $2 of the tax burden.

C. Buyers and sellers rarely share the burden of a tax equally.

D. When a tax of $1.00 per gallon is imposed on sellers of gasoline, the supply curve for gasoline shifts upward, but by less than $1.00.

E. If the equilibrium wage is $4 per hour and the minimum wage is $5.15 per hour, then a shortage of labor will exist.