Question

4. (10 points total) The graph below shows the market for gasoline. A per-unit tax is imposed on sellers of gasoline as shown in the figure below. Price (dollars per gallon) 0 2 4 6 8 10 12 14 Quantity (thousands of gallons per day) (1 point) What is the amount of the per-unit tax? Explain briefly. (2 points) After the tax is imposed, what is the price paid by the buyers? Explain briefly. (2 points) After the tax is imposed, what is the price kept by the sellers? Explain briefly. (2 points) What is the total amount of tax revenue collected by the taxing authority? Show your calculation. (2 points) What is the deadweight loss created by the tax? Show your calculation. (1 point) How would your answers to each of the questions above be affected if the per-unit tax were imposed on the buyers instead of the sellers? Explain breifly.

Answer 1

Amount of per unit tax can be calculated as the difference between the price corresponding to a Quantity found through new supply curve and the price corresponding to same Quantity found through old supply curve. Thus Amount of Per unit tax (taking, for example, Q=8000)= $ 3- $1.5= $1.50

The price paid by the buyers after tax is imposed is $2.50 found by the intersection of New supply and the existing demand Curve.

The price kept by seller after the tax is imposed is $1.00 which is the price corresponding to Equilibrium Quantity after tax on the old Supply Curve.

Total Amount of Tax revenue= Per unit tax Rate× Equilibrium Quantity after tax= 1.5×6=$9

Dead weight loss created by the tax= 0.5 × 1.50× 2= $1.5

It doesn't matter if the tax is imposed on buyers or sellers. The effect on price and quantity and my answers to above questions would have remained same.