Question

Assume that a supply of raw land is fixed (vertical supply curve) and that the elasticity of demand for raw land is higher than zero. In such a situation, A tax on raw land causes

In the market for roses, the demand curve is the typical downward-sloping straight line and the supply is the typical upward-sloping straight line. When there is no tax, the equilibrium quantity is 250 roses per week. A tax of $5 allows the government to raise a revenue of $750 per week. From this information, we can conclude that the equilibrium quantity of roses has fallen by

Mark walks Natasha’s dog once a day for $50 per week. Natasha values this service at $65 per week, while the opportunity cost of Mark’s time is $40 per week. The government places a tax of $30 per week on dog walkers. What is the total surplus before and after the tax?

Answer 1

1. A tax on raw land causes no deadweight loss.
In this case, supply of land is inelastic and when either demand or supply is inelastic then there is no deadweight loss.

2. Tax revenue = tax*Quantity after tax = $750
So, quantity after tax = 750/5 = 150
Decrease in quantity after tax = 250 - 150 =100
So, the equilibrium quantity of roses has fallen by 100 roses per week.

3. Total surplus before tax = Natasha's consumer surplus + Mark's producer surplus = (65-50) + (50-40) = 15 + 10 = $25
After the tax, total surplus = 0
(Because there will be no dog walking after the tax.)