ECON 2010 Lecture Notes - Lecture 8: Deadweight Loss, Market Distortion, Economic Surplus

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If the government increases the tax on a good then the price paid by buyers will ______________ and the price sellers receive will _________________.

7. Effect of a tax on buyers and sellers

The following graph shows the daily market for wine. Suppose the government institutes a tax of $23.20 per bottle. This places a wedge between the price buyers pay and the price sellers receive.

Fill in the following table with the quantity sold, the price buyers pay, and the price sellers receive before and after the tax.

               Quantity(bottles of wine)        Price buyers pay(Dollars per bottle)          Price sellers receive(Dollars per bottle)

Before tax            

After tax 

Using the data entered in the previous table, calculate the tax burden that falls on buyers and on sellers, respectively, and calculate the price elasticity of demand and supply over the relevant ranges using the midpoint method. enter your results in the following table.

               Tax burden(Dollars per bottle)         Elasticity

Buyers

Sellers

The burden of the tax falls more heavily on the ..........elastic side of the market.

Consider the following market QD= 15-2P QS= 5P-2.5

a. Let the government impose a tax of 1.4 dollars per unit on the seller. Find the new equilibrium price paid by buyers P_B and the effective price received by sellers P_S.

b. Determine the quantity of the goods bought and sold.

c. Calculate the surpluses and the deadweight loss.

d. Calculate the tax revenue.