Question

Demand: Qd = 200 – 5P Supply: Qs = 5P

If a quantity tax of $2 per unit sold is imposed,

(a)Considering that the government will earn revenue, overall, do you think that the society benefits from the imposition of the tax? Explain.

(b) Calculate the equilibrium market price and the equilibrium quantity sold.

(c) Determine the demand and supply equation after the tax.

(d) What will be the new equilibrium price paid by the buyers and the new price received by the supplier?

(e) Calculate the new equilibrium quantity sold.

(f) Calculate the tax revenue earned by the government.

(g) Calculate the deadweight loss due to the tax.

(h) What determines whether the buyer of the seller bears the burden of the tax?

Answer 1

a. No the total surplus in the society actually reduces after the the tax. Buyers pay higher prices and sellers receive lower price for their good. Equilibrium Quantity falls leading to deadweight loss. So besides the government revenue, iverall the society doesn't benefit form the tax.

b. Equilibrium occurs where Demand is equal to supply.

200-5p=5p

Equilibrium price=200/10= $20

Equilibrium Quantity= 5*20= 100

c. Supply:

Qs= 5(P-2)= 5P-10

Demand:

Qd=200-5P

d. 5P-10=200-5P

210/10= P

P= 21

Equilibrium price paid by the consumer= $21

Equilibrium price received by sellers= $21-$2= $19

e. Equilibrium Quantity

Qd= 200-5*21

Qd= 95

F. Tax revenue= tax*quantity= $2*95= $190

G. Deadweight loss= 1/2*(2)(100-95)= $5

H. Burden of the tax is determined by the elasticity of supply and demand. The more inelastic demand or supply is more will be the tax burden.