ECON 1116 Lecture 6: Supply, Demand and Government Policies

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cerisegiraffe538

4 Feb 2016

School

Northeastern University

Department

Economics

Course

ECON 1116

Professor

Porter( G)

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Document Summary

Econ 1116 lecture # 6- supply, demand and government policies. The government levies taxes on many goods and services to raise revenue to pay for the national defense, public schools etc. The government can make buyers or sellers pay taxes. If there is an increase in taxes by the price of a dollar a unit then the price of the product cannot increase by a dollar from the perspective of the buyer. So the seller spends 1 dollar more and the buyer spends lesser. The consumer does not pay the entire tax. Incidence of tax refers to how the burden of a tax is shared by market participants. Most of the tax has to be born by the seller/producer because it is easier for the buyer/ consumer to leave the market. A larger burden of the tax is born by the consumer in the case where the supply is more elastic than the demand.

Related Questions

The demand for ice cream is given by Q D = 20 - 2P, measured in gallons of ice cream. The supply of ice cream is given by Q S = 4P - 10. Suppose that the government legislates a $1 tax on a gallon of ice cream, to be collected from the seller.

a) As a result of the tax, what is the price paid by buyers?

b) What is the price received by sellers?

Hint: You need to determine the consumer and producer burden of the tax. First, find the equilibrium price and quantity. Then, determine the elasticity of demand and supply. Then, use the share of the tax formula provided to you to determine the burdens. After, that you add the consumer burden to the equilibrium price to find the buyer price. Subtract the producer burden from equilibrium price to find seller price.

olivemoose752

The table below illustrates the market for Internet services. Use a demand-supply

graph to answer the following questions.

Price Q Demanded Q Supplied

(dollars per month) (units per month)

0 30 0

10 25 10

20 20 20

30 15 30

40 10 40

50 5 50

60 0 60

a. What is the market price of Internet services?__________

b. If the government imposes a tax of $15 a month on the market, what price

would the buyer of an Internet service pay?__________

c. What price would the seller of the Internet service

receive?____________________

d. Does the buyer or the seller pay more of the tax? Explain

e. What is the tax revenue collected by the government?__________

f. What is the deadweight loss created by the tax?__________

12. [3 Marks) Assume a perfectly competitive market with demand MWTPQ) = 100-Q and perfectly elastic supply at P = $70. All benefits accrue to the buyer and all costs are borne by the seller. What will be the result of the introduction of a per-unit tax (payable by sellers)? A. Consumer spending on this good definitely decreases. B. Consumer spending on this good definitely increases. C. Consumer surplus increases. D. Total surplus increases. E. The decrease in consumer surplus equals the increase in government surplus.

ECON 1116 Lecture 6: Supply, Demand and Government Policies

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