Suppose that in a perfectly competitive market, demand is given by Q=59.0-P and supply is given by Q=P-28.0. The government imposes a per-unit excise tax of $1 on the good. What is the dead-weight loss? No units, no rounding.
Answer
the equilibrium before tax is at Qd=Qs
59-P=P-28
2P=87
P=43.5
Q=59-43.5
Q=15.5
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after-tax the supply curve is:
Q=P-28
P=Q+28
adding tax
P=Q+28+1=Q+29
P=Q+29
Q=P-29
now the equilibrium at new supply =Qd
P-29+59-P
2P=88
P=44=price consumer pay
Price producer receives =P-tax=44-1=43
Q=59-44=15
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deadweight loss =0.5*tax per unit * change in quantity
=0.5*1*(15.5-15)
=$0.25
the deadweight loss is 0.25
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Suppose that in a perfectly competitive market, demand is given by Q=59.0-P and supply is given...
Suppose that in a perfectly competitive market, demand is given by Q=59.0-P and supply is given by Q=P-28.0. The government imposes a per-unit excise tax of $1 on the good. What is consumer surplus after that tax is imposed? No units, no rounding.
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