The imposition of a tax involves an “excess burden.” How would you show a similar result with a general equilibrium diagram (Note: With the general equilibrium diagram, you must be more precise about how tax revenue is used.)
The imposition of a tax involves an “excess burden.” How would you show a similar result with a general equilibrium diagram (Note: With the general equilibrium diagram, you must be more precise about how tax revenue is used.)
Chapter6: Demand Relationships Among Goods
Section: Chapter Questions
Problem 6.4P
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The imposition of a tax involves an “excess burden.” How would you show a similar result with a general equilibrium diagram (Note: With the general equilibrium diagram, you must be more precise about how tax revenue is used.)
![Figure 11.3 How Perfectly Competitive Prices Bring about Efficiency
▸ Details
Quantity of
Y per week
P
Y₁
Y*
Efficient prices (slope = P*/P)
Initial prices (slope = P1/P₁)
C*
U3
0
X₁
X*
P'X'₁
Quantity of
X per week
With an arbitrary initial price ratio, firms will produce X₁, Y₁ ; the economy's budget
constraint will be given by line CC. With this budget constraint, individuals demand X,
Y', that is, there is an excess demand for good X(X-X₁) and an excess supply of
good Y(Y₁-Y). The workings of the market will move these prices toward their
equilibrium levels Px, Pỷ. At those prices, society's budget constraint will be given by
the line C*C*, and supply and demand will be in equilibrium. The combination X*,
Y* of goods will be chosen, and this allocation is efficient.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fde87f139-11fd-4595-b906-d6288f3fd466%2F055eed92-7f93-453b-886e-374590c75701%2Fbwrr6duh_processed.png&w=3840&q=75)
Transcribed Image Text:Figure 11.3 How Perfectly Competitive Prices Bring about Efficiency
▸ Details
Quantity of
Y per week
P
Y₁
Y*
Efficient prices (slope = P*/P)
Initial prices (slope = P1/P₁)
C*
U3
0
X₁
X*
P'X'₁
Quantity of
X per week
With an arbitrary initial price ratio, firms will produce X₁, Y₁ ; the economy's budget
constraint will be given by line CC. With this budget constraint, individuals demand X,
Y', that is, there is an excess demand for good X(X-X₁) and an excess supply of
good Y(Y₁-Y). The workings of the market will move these prices toward their
equilibrium levels Px, Pỷ. At those prices, society's budget constraint will be given by
the line C*C*, and supply and demand will be in equilibrium. The combination X*,
Y* of goods will be chosen, and this allocation is efficient.
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