Question

Figure 18P-6 shows the daily market for waterskiing permits on El Dorado Lake. Suppose each

skier (each permit) causes $4 of damage to the lake.

a. Calculate the loss of surplus if there is no government intervention in this market.

b. Suppose the government imposes a $12 tax on suppliers of ski permits. Compared to no intervention, what is the net surplus gain or loss from this tax?

c. What is the socially optimal level of water skiing?

Answer 1

Market condition:

Figure -1 illustrates the demand and supply of the market:

$C:\Users\300736\AppData\Local\Microsoft\Windows\Temporary Internet Files\Content.Word\520234-18-10PA.JPG$

Figure 1

In figure -1, horizontal axis measures quantity and vertical axis measures price. The curve D represents demand and curve S represents supply. Market is in equilibrium at the point where demand curve is intersects with the supply curve.

a.

Loss of surplus:

If there is a damage caused worth of $4 then $2 is borne by the consumer. This leads to reduce the quantity to 30 units. (Shift of the demand curve leftward equal to $4) Loss of surplus can be calculated as follows:

Loss of surplus is .

b.

New loss of surplus with $12 tax:

If there is imposition f tax $12 then $6 is borne by the consumer. This leads to reduce the quantity to 10 units. (Shift of the demand curve leftward equal to $12) Loss of surplus can be calculated as follows:

Loss of surplus is .

Social optimal quantity:

Social optimal quantity is the quantity that demanded after internalizing the damage. Since the equilibrium quantity after internalizing the damage is 30 units, social optimum level of quantity is 30 unts.