Question

Soda: P = 110 − Qd and P = 4+ 2Qs
where the unit for Q is measured in thousands of cans, and the unit for P (price per can)

Candy: P=210−4Qd and P=25+Qs
where the unit for Q is measured in thousands of packs, and the unit for P (price per pack)

Suppose you can choose only ONE of the two goods to apply an excise tax on the producer side of the particular market.

Option 1 Apply the excise tax of $15/can to Soda and Option 2 Apply the excise tax of $15/pack to Candy

When analyzing a taxation on each good for the appropriate option, you must know the equilibrium traded price and quantity after taxation, the price that producers receive at the new equilibrium, tax revenue, consumer’s tax incidence, producer’s tax incidence and deadweight loss for both options. (incidence refers to the share of the tax burden).

1. What is the equilibrium price and quantity in each market before any tax is introduced? What is the consumer and producer surplus in each case?
2. What would be the equilibrium price and quantity in each market once the tax is introduced?
3. What is the consumer surplus, producer surplus and deadweight loss in each case? Draw and show the same in separate graphs.
4. What is the tax incidence in each case, that is how much of the tax is passed on to the con- sumers and producers in each case?
5. What is the government revenue in each case?
6. Which optionshould the tax authority choose if they want to(a) maximize revenue,(b)min- imize the tax burden on consumers, (c) minimize the tax burden on producers, (d) minimize deadweight loss?

Answer 1

F.

Based on the above discussion and the numbers for each market, the following conclusion is drawn:

	Objective	Market to tax
a)	Maximize revenue	Candy
b)	Minimize tax burden to consumers	Soda
c)	Minimize tax burden to producers	Candy
d)	minimize deadweight loss	Candy