Question

From April 8 to November 6, the Port of Halifax is expecting 192 vessel calls carrying approximately 320,000 cruise guests.

1. Assume the market for cruise-ship travel is in equilibrium with a relatively elastic demand curve and a relatively inelastic supply curve.

Explain and show on a diagram, how the introduction of an excise tax on cruise-ships vacations will impact equilibrium price and quanitity as compared to the initial equilibrium?

2. How is the burden of the tax distributed between buyers and sellers? Why?

3. On a new diagram, show the change in consumer and producer surplus, the tax revenue collected by the government and the deadweight loss which results from the introduction of the excise tax.

Answer 1

Ans )

(a) Initial equilibrium price is P and quantity is Q.

After the imposition of tax, the equilibrium quantity decreases to Q' because both sellers and buyers sell and purchase respectively less quantity.

After the tax, the price that buyers pay is P' and the price that seller receives is P".

The difference between the 2 price ; i.e. (P' - P") is the amount of excise tax.

Price Price - tax P QO Quantity

Ans 2.)

In the above diagram, we can see that the buyer pays less amount of tax (P'- P) as compared to the seller who pays (P - P"). So, clearly seller bears the more burden of tax as compared to the buyer.

The more birden is borne by the seller because his supply curve is inelastic.More inelastic is the curve, higher would be the tax burden.

Similarly, buyer bears the less tax burden because his curve is elastic.

Ans 3.) In the below diagram, we can see that the green colored region is the consumer surplus; yellow is the producer surplus; both have decreased.

The red colored region is the tax revenue going to government.

The pink colored region is the deadweight loss or simply the welfare loss of the society.

Price P' • - - Pl--- - PERY - - Q Q Quantity