Most of the world’s governments have struggledto handle the issue of allowing consumption of forbiddengoods, such as alcohol, cigarette, tobacco etc. to its population. Various methods of control have been exercised world over, such as, complete ban on these goods, a restricted consumption regime with quota on consumption or quota on selling, price floorskeeping the price of these goods high up in order to reduce demand and imposing high taxes to generate same effect. None of thee seem to have worked to control the availability and consumption of such goods by the society. These are called social bads, asthey not only are harmful for the personconsuming them, there are external effects on others, such as family and friends and the larger society.In Rampur, Alcoholare forbidden, so people trade Alcohol bottlesin a black market. The Alcoholdemand is QD = 12 − P , and the supply is Qs = 2P(a)Find the equilibrium price and quantity in the black market. (b) The government becomes aware of the black market and reinforces the police so that half of the alcoholsupply would be seized and destroyed. Under this circumstance, what are the demand and supply functions? What is the new equilibrium price and quantity? (c) How does the consumer surplus change between (a) and (b)?
Most of the world’s governments have struggledto handle the issue of allowing consumption of forbiddengoods, such as alcohol, cigarette, tobacco etc. to its population. Various methods of control have been exercised world over, such as, complete ban on these goods, a restricted consumption regime with quota on consumption or quota on selling, price floorskeeping the price of these goods high up in order to reduce demand and imposing high taxes to generate same effect. None of thee seem to have worked to control the availability and consumption of such goods by the society. These are called social bads, asthey not only are harmful for the personconsuming them, there are external effects on others, such as family and friends and the larger society.In Rampur, Alcoholare forbidden, so people trade Alcohol bottlesin a black market. The Alcoholdemand is QD = 12 − P , and the supply is Qs = 2P(a)Find the
(b) The government becomes aware of the black market and reinforces the police so that half of the alcoholsupply would be seized and destroyed. Under this circumstance, what are the demand and supply functions? What is the new equilibrium price and quantity?
(c) How does the
(d)Suppose that the government changes the policy and legalizes alcoholtrade. Now alcohol bottlesare traded in an open market. However, for every bottleof alcoholpurchased, the buyer has to pay tax T to the government. T is equal to the pre-tax price P(from question a). What are the demand and supply functions under this circumstance? What are the equilibrium (pre-tax) price and quantity? What is the after-tax price paid by buyers?
(e) Compare (b) and (d). Which policy do consumers prefer? Which policy does the government prefer? Why?
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