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NUTR 430 Chapter Notes - Chapter 8: Deadweight Loss, Laffer Curve, Tax Rate

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yellowcrow222
20 Feb 2015
School
WLU
Department
Economics
Course
NUTR 430
Professor
Peter Sinclair

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Document Summary

Market is at equilibrium; surpluses are maximized. Ps = d + e + f. No tax = no tax revenue for the gov"t. P pd. by buyers rise from p1 to pb; cs = area a. Amount received by sellers fall from p1 to ps; ps = area f. Q sold falls from p1 to pb; tax revenue = b + d. Total surplus = cs + ps + tax rev = a + f + b + d. Total welfare = tax revenue cs ps. Total surplus falls by area c + e (aka the deadweight loss) Losses to buyers and sellers from a tax > tax revenue. Deadweight loss the fall in total surplus that results from a market distortion, such as a tax. Prevents buyers and sellers from realizing some gains from trade. Elasticity of supply and demand how much the qd or qs respond to a in p.

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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 − 2Q. The total cost of producing Q units is C(Q) = 20Q + 2Q2 .

a) Identify the unregulated equilibrium (P ∗ , Q∗ )

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 τ = 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, α = 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.

Consider the following market QD= 15-2P QS= 5P-2.5

a. Let the government impose a tax of 1.4 dollars per unit on the seller. Find the new equilibrium price paid by buyers PB and the effective price received by sellers PS.

b. Determine the quantity of the goods bought and sold.

c. Calculate the surpluses and the deadweight loss.

d. Calculate the tax revenue.

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)