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ECON 040 Lecture Notes - Lecture 22: Deadweight Loss, Marginal Cost, Economic Equilibrium

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taupesardine275
30 Dec 2020
School
College of The Sequoias
Department
Economics (ECON)
Course
ECON 040
Professor
kasun

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Document Summary

Assume it is levied on producers, however the results would be the same if it were levied on consumers. Producers would see this as an increase in the cost of production at all quantities by exactly the amount of tax. Marginal cost increases by exactly the tax amount. Hence, tax shifts the supply curve to the left, where the vertical distance between the original and shifted supply curve is equal to the tax amount. By introducing a tax, surplus will decline due to the increase in price whether it is consumer, producer or both is determined by how the producers decide to set the price. If they decide to pass the full cost of the tax to consumers, consumer bear the full incidence of the tax. However if the producer only raises the prices by an amount smaller than the tax, the producer must bear the rest of the tax. Tax revenue: the tax revenue is given by the formula:

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Related Questions

Politicians concerned with climate change are proposing that a tax on electricity should be implemented with the hope that it will incentivize energy abatement. But they are also want to structure a policy such that it is the producers of electricity that pay the tax, not the consumers. Therefore, they propose a tax of $1/MW h to be paid by the generator of electricity. You have been hired to assess the economic implications of the proposed tax.

After running your econometric modeling, you conclude that the market for electricity is characterized by the following equations:

Demand Curve: P = 40 - 3Qd

Supply Curve: P = Qs

Where P is dollars per MWh and Q is Millions of MWhs.

Part 1: What are the equilibrium price (P) and quantity (Q) with no tax assessed?

Part 2: What will be the equilibrium quantity after the tax is assessed? What is the price that the consumer will pay after the tax is assessed? What is the price that the producer will receive after the tax is assessed?

Part 3: Was the politician successful in reducing electricity usage? If so, by how much?

Part 4: How much tax revenues are raised by the new tax?

Part 5: What is the tax incidence to the consumers?

Part 6: What is the tax incidence to the producers?

Part 7: Was the policymaker successful in assessing the tax on producers, not consumers?

Use the accompanying graph to answer these questions. (LO2, LO3, LO4) a. Suppose demand is D and supply is S0. If a price ceiling of $6 is imposed, what are the resulting shortage and full economic price? b. Suppose demand is D and supply is S0. If a price support of $12 is imposed, what is the resulting surplus? What is the cost to the government of purchasing any and all unsold units? c. Suppose demand is D and supply is S0 so that the equilibrium price is $10. If an excise tax of $6 is imposed on this product, what happens to the equilibrium price paid by consumers? The price received by producers? The number of units sold? d. Calculate the level of consumer and producer surplus when demand and supply are given by D and S0 respectively. e. Suppose demand is D and supply is S0. Would a price ceiling of $2 benefit any consumers? Explain.

in Iceland, demand and supply for television use (pay per view) by choice is described by the following demand and supply functions (v represents price per item)

Demand = 198 - 2v

Supply = -2 + 2v

The world market price for TV use is ISK 30. Price per item.

a) Calculate and draw a balance on a picture

i) if no foreign trade is allowed and foreign providers are excluded by excluding IP addresses.

(ii) if 14% VAT is levied on domestic broadcasters and foreign trade is prohibited. The tax is collected by consumers (no collection costs). What is the welfare loss from the tax? Show a picture.

iii) how is the tax burden divided into point ii) and what are its explanations?

b) Domestic tech nerds have avoided technical barriers to using foreign streaming services (VPN gymnastics) and the government does not have the ability to collect VAT on that use and subsequently decide to stop collecting VAT on domestic use: Calculate domestic production, domestic consumption and import. Draw a picture and calculate and benefit from the opening of a business (pretend that there was no VAT for freedom).

c) Due to the pressure of special interest groups of domestic producers, a decision is now made to impose a 30% duty on the world market price of imports (foreign streaming services), but the government has now found that traditional duty can be collected through credit card companies' transactions (no VAT).

i) What will be the price, imports, demand and domestic supply.

ii) How does producer and consumer profit change from point b)?

iii) What will be the macroeconomic loss due to duty compared to free trade without VAT?