7. Incidence and Welfare Effects of a Tax The demand and supply curves for the perfectly competitive thingamajig market are: Demand (D): P = 12 - Q Supply (S): P = 3+ 0.5Q a. Calculate the market equilibrium quantity and price. Q* = %3D P* = b. Calculate consumer surplus, producer surplus, and total surplus in the market equilibrium. CS* = %3D PS* = Total surplus = CS* + PS* = %3D C. Suppose the government imposes a specific tax (excise tax) of t = $1.50 on sellers of thingamajigs. Write the new supply equation (STAX). P =
7. Incidence and Welfare Effects of a Tax The demand and supply curves for the perfectly competitive thingamajig market are: Demand (D): P = 12 - Q Supply (S): P = 3+ 0.5Q a. Calculate the market equilibrium quantity and price. Q* = %3D P* = b. Calculate consumer surplus, producer surplus, and total surplus in the market equilibrium. CS* = %3D PS* = Total surplus = CS* + PS* = %3D C. Suppose the government imposes a specific tax (excise tax) of t = $1.50 on sellers of thingamajigs. Write the new supply equation (STAX). P =
Chapter1: Making Economics Decisions
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Transcribed Image Text:7. Incidence and Welfare Effects of a Tax
The demand and supply curves for the perfectly competitive thingamajig market are:
Demand (D): P = 12 - Q
Supply (S): P = 3+ 0.5Q
a. Calculate the market equilibrium quantity and price.
Q*
P* =
b. Calculate consumer surplus, producer surplus, and total surplus in the market equilibrium.
CS* =
PS* =
Total surplus = CS* + PS* =
c. Suppose the government imposes a specific tax (excise tax) of t = $1.50 on sellers of
thingamajigs. Write the new supply equation (STAX).
P =
d. Calculate consumer surplus (CSTAX), producer surplus (PSTAX), the amount of tax revenue
(TAX), and total surplus in the new market equilibrium under the tax.
CSTAX =
PSTAX =
TAX =
Total surplus = CSTAX + PSTAX + TAX =
11
Transcribed Image Text:e. Find the change in social welfare as a result of the tax. onabion
ASW =
f. Find the deadweight loss caused by the tax as the area of a triangle in the graph.
DWL =
Q
12
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