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ECON 200 Lecture Notes - Lecture 9: Deadweight Loss, Market Distortion, Tax Rate

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orangecamel475
20 Dec 2016
School
UW
Department
Economics
Course
ECON 200
Professor
Ken Ho

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ECON 200 Full Course Notes
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Document Summary

Raises price for buyers and reduce the price sellers receive. Effects are the same whether tax is on buyers or sellers. Tax revenue funds beneficial services so we include it in total surplus. The lost area due to tax on a supply and demand curve is called deadweight loss: the fall in total surplus that results from a market distortion, like tax, subsidy, price floor, or price ceiling. Value of the units to buyers is greater than the cost producing when there is a tax. The goal is to tax goods with small deadweight loss, which depends on the elasticity of supply and demand. When supply is inelastic, it"s harder for firms to leave market when tax reduces supply price. When supply is elastic, it"s easier for firms to leave when tax reduce price of supply, the greater q falls below the surplus maximizing quantity the greater dwl.

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Related Questions

Suppose that a market is described by the following supply and demand equations:

QS= 2P

QD = 300P

a. Solve for the equilibrium price and the equilibrium quantity.

b. Suppose that a tax of T is placed on buyers so the new demand equation is QD = 300 (PT). Solve for the new equilibrium. What happens to the price received by sellers, the price paid by buyers, and the quantity sold?

c. Tax revenue is T×Q. Use your answer to part (b) to solve for tax revenue as a function of T. 
d. The deadweight loss of a tax is the area of the triangle between the supply and demand curves. Recalling that the area of a triangle is , solve for deadweight loss as a function of T. 

(Hint: Looking sideways, the base of the deadweight loss triangle is T, and the height is the difference between the quantity sold with the tax and the quantity sold without the tax.)

 

Problem II: A competitive market is defined by the following demand and supply functions: P = 210 - 2Q and P = 30 + Q. a) Calculate total welfare on this market (5400) b) Calculate total welfare and the deadweight loss if a price floor of $80 is introduced by the government (5400, 0) c) Calculate consumer surplus, producer surplus, and the deadweight loss if a price floor of $110 is introduced by the government (2500, 2750, 150) d) Calculate total welfare and the deadweight loss if a price ceiling of $70 is introduced by the government (4800, 600) e) Calculate total welfare and the deadweight loss if a price ceiling of $100 is introduced by the government (5400, 0) f) Calculate total welfare and the deadweight loss if a per unit tax of $30 is introduced by the government (5250, 150) g) At this tax level, calculate the marginal effect of a tax increase on deadweight loss? (10)

The market for packets of cigarettes has been described by the following supply and demand functions:

Supply: P = 10 + 4Q Demand: P = 100 - 5Q where P is the price in dollars and Q is the quantity of packets of cigarettes per month (in thousands).

Part A) Construct a graph of supply and demand for this market showing all intercepts. What are the equilibrium prices and quantities? Show these on your graph.

Part B) At the market equilibrium price, what would be the total monthly revenue?

Part C) Calculate consumer surplus at the market equilibrium and indicate this surplus as an area on your diagram.

Part D) Calculate producer surplus at the market equilibrium and indicate this surplus as an area on your diagram.

Part E) Assume that a per-unit tax of $9.00 per packet of cigarettes is imposed by the government on the suppliers of cigarettes. Depict this on your demand and supply diagram. (Hint: the new tax inclusive supply function will be: P = 19 + 4Q). What is the new market equilibrium quantity? What price will consumers now pay and what price will suppliers now receive?

Part F) How much is the government revenue from the tax on suppliers?

Part G) Calculate consumer surplus and producer surplus after the imposition of the tax and any deadweight loss associated with the tax. Indicate these surplus and tax revenue areas on your diagram. Explain what the deadweight loss represents.

Part H) Now assume that instead of imposing a per-unit tax of $9.00 per pack on the suppliers of cigarettes the government decides to apply the same per-unit tax of $9.00 on consumers. Depict this on your demand and supply diagram. (Hint: the new tax inclusive demand function will be: P = 91 - 5Q) What is the new market equilibrium quantity? What price will consumers now pay and what price will suppliers now receive? (5 marks)

Part I) How much is the government revenue from the tax on consumers? (1 mark)

Part J) Who bears the greatest burden of the tax in each case, producers or consumers? Does your answer depend on whether the tax is levied on producers or consumers?

I am really having difficulty understanding Part J - can that please be answered with some detail?