Question
In: Economics
32. Suppose that in the market for coffee, the government decides to impose a tax on...
32.
Suppose that in the market for coffee, the government decides to
impose a tax on the consumption of coffee.
a.
Illustrate the equilibrium market for coffee reflecting the new
tax.
b.
On your graph, label the new price that consumers pay as
Pc
c.
On your graph, label the new price that sellers receive as
Ps
d.
On your graph, shade in the area representing the tax revenue
received by the government and label it (TR).
e.
On your graph, shade in the area of consumer surplus and label it
(CS).
f.
On your graph, shade in the area of producer surplus and label it
(PS).
g.
On your graph, shade in the area of deadweight loss, if any and
label it (DWL).
h.
What does deadweight loss mean?
Solutions
Expert Solution
Answer)
(a) As we can see in the below diagram, the initial equilibrium price is "P" and the equilibrium quantity is "Y".
After the tax, the equilibrium quantity decreases to Y1 as the tax makes the coffee costlier for the buyer due to which there decrease in the quantity demanded.
(b) After-tax, the price paid by the consumer increases and the same has been represented on the below diagram and labelled as P(c).
(c) After-tax, the price received by the seller decreases and the same has been represented on the below diagram and labelled as P(s)
(d) The orange colour region in the below diagram represents the tax revenue and it is calculated as -
Tax revenue = Tax per unit × Quantity after tax.
(e) The green colour region represents the consumer surplus after tax.
(f) The pink coloured region is the producer surplus.
(g) The red coloured region represents the deadweight loss.
(h) Deadweight loss is the loss that represents the economic loss (or inefficiently ) arising out of a policy. It basically represents a decrease in the overall welfare of society.
Rahul Sunny answered 2 years agoRelated Solutions
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On your graph, label the new price that sellers receive as
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On your graph, shade in the area representing the tax revenue
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