Assume that the market demand and supply curves for milk are as shown
in the graph below.
As shown in the graph, the market clearing price is $3 per gallon and the quantity
exchanged is 100 gallons per hour. Now assume that the government imposes a tax of
2$ per gallon of milk produced.
a.
What is the total tax revenue the government will collect? Also, shade
the area on your graph where the total tax revenue is represented.
b.
How much of this total will consumers pay?
c.
How much of this total will producers pay?
d.
Shade the area on your graph that shows the deadweight loss.
e.
If the demand for milk is perfectly inelastic, how would your analysis
change? Draw the graph and answer the above questions again.
Homework Answers
if a $2 tax is imposed on the market, the tax revenue collected will equal (4-2)*80 = 160
Consumers will pay $4, tax incidence will be $1 = 1*80 = 80 (Revenue from consumers)
and Producers will get $2 and tax incidence on them will be $1. = 1*80 = 80 (Revenue from Producers)
if the demand is perfectly inelastic then all of the tax incidence will be borne by the buyers.The buyers will pay whole $2 tax.
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