Question

Part A Product X has the following demand and supply functions:

Qd = 30 – 2p

Qs = -10 + 6p

The government does not currently place indirect taxes on Product X. The production and consumption of Product X, however, is considered to be undesirable. The government subsequently places an indirect tax on the product which creates a producers price of $4. Product X also has a coefficient of income elasticity of +2 Use the above information to :

Draw a demand and supply graph illustrating the market for Product X both before and after the imposition of the indirect tax.

Calculate the tax per unit and total tax collected by the government.

Calculate and explain consumer surplus, producer surplus and deadweight loss before and after the imposition of the indirect tax.

Calculate the price elasticity of demand for Product X (use the arc method to calculate elasticity)

Calculate and explain the burden of the tax.

Discuss the relationship between the burden of the tax and the coefficient of elasticity calculated in part iv.

­ Part B

The government increases direct (income) tax by 10% and this decreases average disposable income by 3%.

Use the above demand and supply functions as a guide to discuss the impact of this policy on the demand for Product X.

Explain whether the government is likely to reduce indirect taxes or increase direct taxes in order to discourage the consumption of Product X.

Question 2 ­Small Scale Solar Power Energy The average price of a 4KW solar panel system is approximately $4500 in Victoria.

The Victorian Government has introduced the “Solar Homes Program” which provides eligible households with a government rebate of approximately $2300 to install a home solar system.

This rebate is paid to the installer of the solar system. Households with solar panels can, in addition, receive a feed-in rebate (or cash return) of approximately 12 cents per kilowatt hour for any unused solar energy which is returned to the state electricity grid or supply. Use the above information to:

Discuss the market failure evident in this industry. Your answer should include a discussion of the most significant economic concepts relating to this market failure. Concepts that should be included but not limited to are: allocation of resources, type of externalities, corrective measures by the government, how market failure arises.

Draw a graph for the market for solar systems and energy which demonstrates and illustrates the market failure discussed in part (i) and the intended effect of the government policy outlined in the above question.

Discuss and graphically illustrate how the above government policies are likely to affect the market for non-renewable sources of electricity, such as coal fired power (fossil fuels).

In your answer you should identify two relevant conditions (determinants) of demand and two relevant conditions (determinants) of supply in the market for non-renewables.

Answer 1