Question

In: Economics

If the government decides to impose a tax of 20 cents per liter on petrol, illustrate the impact of the tax on market equilibrium price

If the government decides to impose a tax of 20 cents per liter on petrol, illustrate the impact of the tax on market equilibrium price, and discuss whether the outcome is efficient by demonstrating the change of consumer’s and producer’s surplus as a result of tax . - Draw a demand and supply model with demand curve - Show the shift of S as a result of 20 cent tax. - Mark the price paid by consumer and received by the seller. - demonstrate change of consumer and producer’s surplus, tax revenue, and deadweight loss

Solutions

Expert Solution

Price paid by consumer = Pc

Price received by seller = Ps

Consumer surplus before tax = ABC

Consumer surplus after tax = AEF

Change in consumer surplus = EFBC

Producer surplus before tax = BCD

Product surplus after tax = GHD

Change in producer surplus = BCHG

Tax revenue = EFHG

Dead weight loss = FCH


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