Question 1: Tax Incidence with Linear Supply and Demand (60p) In the market for tulips ,...

Question 1: Tax Incidence with Linear Supply and Demand (60p) In the market for tulips , the demand curve is: qd = 50 − 3p and the supply curve is: qs = 2p. Assume for now that there are no externalities or pre-existing market distortions, so these represent the true social marginal benefit and marginal cost curves. The government decides to raise revenue by taxing consumers t = 5/3 for every tulip purchased. a) Graph the supply and demand curves, and indicate how the curves shift after implementation of the tax. Label deadweight loss, tax revenue, consumer and producer surplus. Show the price paid by consumers and the price received by producers, and use these to indicate the burden borne by each party due to the tax. b) Calculate the change in consumer and producer surplus from the tax, and how much revenue is raised by the tax. Also, using the pre-tax price, the post-tax price and the tax, calculate what proportion of the tax is borne by each party. c) Calculate the demand and supply elasticity at the pre-tax equilibrium and use the elasticities to confirm your answer for what proportion of the tax is borne by each party. d) Calculate the deadweight loss from the tax directly from supply and demand functions. Then, use the Harberger formula for deadweight loss to confirm your answer.

Expert Solution

Rahul Sunny answered 5 months ago

14.When supply and demand are linear curves, the incidence of the tax is always split equally...

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The incidence of a unit tax depends on the elasticities of supply and demand. By assuming...

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Question 1. This question looks at effects of a tax. Suppose that the demand and supply...

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Suppose the demand curve and the supply curve in a market are both linear. To begin,...

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What is tax incidence? How does it relate to price elasticity of supply/demand? How might understanding...

What is tax incidence? How does it relate to price elasticity of supply/demand? How might understanding tax incidence be important when evaluating public policy proposals?

Consider a tax on the producers in a market. By using supply and demand curves, show...

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Use the following equations to calculate aspects of the incidence of a tax on demand: Qd...

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