Question

The U.S. supply and demand curves for cars cross at $10,000. Foreigners will purchase any quantity of American cars for $15,000 each. One day, the government imposes a tax of $2000 export tax on every American car sold to a foreigner. (Cars sold to Americans are not taxed.) What price must Americans pay for a car before the tax is imposed? What price must Americans pay for a car after the tax is imposed? What price do American producers feel they are receiving for a car before the tax is imposed? What price do American producers feel they are receiving for a car after the tax is imposed? Before and after the tax is imposed, show in a diagram the gains and losses to all relevant groups of Americans. What is the deadweight loss due to the tax?

Answer 1

The U.S. supply and demand curves for cars cross at $10,000. Foreigners will purchase any quantity of American cars for $15,000 each. One day, the government imposes a tax of $2000 export tax on every American car sold to a foreigner. (Cars sold to Americans are not taxed.)

Here in this question, since domestic consumers don't have to pay any tax, they will continue to pay $10,000 for a car, before and after imposition of taxes since these taxes are export taxes, i.e. tax on cars sold to foreigners and hence do not impact Americans.

If we talk about Producers of exporting country, the price before exporting the cars was $10,000. After Exports, they were getting the Price of product equals to $15,000. When Government imposes tax of $2,000, their exports price declines to $13,000. This will again decline the Producer's surplus in the market and Increase the Consumer's surplus.

Lets take the help of a Diagram to understand more clearly,

In the diag, 'e' is the equillibrium price $10,000, p is the domestic price and Q is the quantity supplied. As given in the question, p_ex is the export price $15,000, and Q_d is the quantity demanded and Q_s is the quantity supply. Here, producer's surplus is p_exBO. and Consumer's surplus is area p_exAD.

When export taxes are imposed, Price for producers will decline to p^t, therfore, new quantity demanded is Q_d^t and new quantity supplied is Q_s^t. so, producer's surplus declines to area p^tCO with yellow color and consumer's surplus increase to area p^tFD which is Green color.

Deadweight loss would be area AA'F + area BB'C which is Pink color.