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ECON 1900 : Ch 4 Elasticity and the Incidence of a tax.pdf

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School
TRU
Department
Economics
Course
ECON 1900
Professor
Nancy Carson

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Document Summary

Incidence of the tax depends on relative elasticity of demand compared to elasticity of supply. The tax in both diagrams is per unit. But the burden of the tax faced by consumers and producers differs. Supply is relatively more elastic than demand in the diagram to the right. Try it yourself: add a tax of per unit in both diagrams and compare the consumer and producer burden in each case. Notice demand is more elastic than supply in the right-hand diagram.

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Related Questions

Suppose that a $1 per gallon of gasoline tax is eliminated. After removal of the tax the quantity demanded of gasoline increases from 8 million gallons per week to 8.5 million gallons per week. After the removal of the tax, the price paid by consumers for gasoline decreased to $2.90 per gallon. The price paid by consumers prior to the removal of the tax was $3.10 per gallon inclusive of all taxes. Over this range of market prices we could infer that supply is price elastic than demand and prior to the removal of the tax, the tax burden was A. less; higher on consumers B. more; 50 percent to both producers and consumers C. less, higher on producers D. more; higher on consumers E.more; higher on producers

1. Explain the law of diminishing marginal utility, and give an example to illustrate it.

2. If demand is elastic and price is raised, what happens to total revenue? Can you prove this?

3. Estimate your elasticity of demand for (a) gasoline; (b) cigarettes; (c) video rentals.

4. Why is industry supply more elastic in the long run than in the short run, and more elastic in the short run than in the market period?

5. How do the relative elasticities of demand and supply affect the relative tax burdens of the buyer and the seller?

6. What are the major determinants of the elasticity of demand?

 

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?