3. Suppose a tax is imposed on the buyers of driveways. Suppose the tax is exactly the right amount to make the quantity achieved equal to the new equilibrium. Sketch the change(s) to the market with your tax imposed. Identify the losses to consumers and suppliers, dead weight loss and government revenue. Discuss dead weight loss in this context.
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Externalities and Tax Incidence 1. Sketch a
Answer for number 1
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Elasticity in economics refers to the percentage change in one economic variable in response to the percentage change in another economic variable. While analysing the elasticity of consumers, we usually look at the
The lesser the change in the quantity demanded in response to a change in its price, the lesser the price elasticity of demand, and the lesser the quantity supplied in response to a change in its price, the lesser the price elasticity of supply.
In the case of paved driveways, we can say that consumers have high elastic demand because a paved driveway is not a necessity, but a luxury, and luxury goods have high elasticity of demand. On the other hand, sellers are less elastic because the cost of production of paved driveways is high because of the high prices of raw materials such as asphalt and cement and the cost of storing such materials is also high.
Therefore, even with an increase in the price of paved driveways, the quantity supplied of driveways does not increase much, leading to low elasticity of supply. Answer 1) Explanation (step 2)
The supply and demand framework for paved driveways will be as follows:
Ive attached the graph/model.
The X-axis shows the quantity of paved driveways and the Y-axis shows the price of paved driveways. D1 and S are the initial demand and supply curves respectively, with price P1 and quantity Q1. When the price increases to P2 and the quantity increases to Q2, D1 shifts to D2. However, we can see that when the demand curve shifts along the supply curve, the increase in quantity supplied is less than the increase in price of the good, which is the paved driveway in this case. Therefore, the price elasticity of supply is low.
Answer 1) Conclusion
Therefore, from the above demand and supply framework of paved driveways and its explanation it can be concluded that sellers are less elastic.
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