Question

1. Understanding the implications of taxes on welfare The following graph represents the demand and supply for an imaginary good called a pinckney. The black point (plus symbol) indicates the pre-ta equilibrium. Suppose the government has just decided to impose a tax on this market the grey points (star symbol) indicate the after-ta scenario. 2 Demand Supply 13.00 . 9.00 5.00 QUANTITY (Pinckneys)

Answer 1

The pre-tax equilibrium is determined by the intersection of the demand and the supply curve The pre-tax equilibrium is reached at a price of S9 and equilibrium quantity is 1t8 The missing information can be computed using the concepts of the microeconomics The per-unit tax is calculated by taking the difference between the price paid by the buyers and the price received by the sellers Tax S(13-5)-S8 Therefore, per unit tax is S8 The price paid by the consumers after tax is S13. The price paid by the buyers is calculated by adding the tax to the price paid by the seller Price paid by consumers- Price recieved by sellers + Per-unit tax Price paid by consumers $8+ $5 Price paid by consumers-$13 The equilibrium quantity before tax is 18 units which is determined by the intersection of quantity demanded and the quantity supplied curve The dead weight loss is the loss of society welfare which is incurred due to imposition of tax. The dead weight loss is mathematically expressed as DWL -x Change in price x Change in quantity The dead weight loss after the tax is imposed is determined by the area C and E The consumer surplus after tax is imposed is determined by the area below the demand curve and above the price paid by the buyers ($13). Thus, the consumer surplus area after tax is determined by area A The producer surplus after tax is imposed is determined by the below the price paid by the sellers (S5) and above the supply curve. Thus, the producer surplus area