Question

The Policy: Work on your own (graded). The President is considering the following policies, each of which is aimed at reducing violent crime by reducing the use of guns. In your report, illustrate each of these proposed policies in a supply-and-demand diagram of the gun market, and explain whether the policy will have the desired effect on the gun market. I. a tax on gun buyers 2. a tax on gun sellers

Answer 1

Ans:-

The In each graph, price and quantity of guns are measured vertically & horizontally respectively. D0 & S0 are initial demand & supply curve for guns, intersecting at point a with initial equilibrium price P0 & quantity Q0.

(1) A tax on gun sellers will lower the effective price received by sellers, so the sellers will lower production. Supply will fall, shifting supply curve leftward, increasing price and decreasing quantity. In following graph, as supply shifts left to S1, it intersects D0 at point B with higher price P1 & lower quantity Q1.

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(2) A tax on gun buyers will increase the price paid by buyers, so the buyers will decrease demand. The demand will fall, shifting demand curve leftward, decreasing price and decreasing quantity. In following graph, as demand shifts left to D1, it intersects S0 at point B with lower price P1 & lower quantity Q1.

(3) A price floor, to be binding, is imposed above free market equilibrium price. At this higher price, quantity demanded will fall and quantity supplied will rise, creating a surplus. In following graph, as a price floor of Pf is imposed, quantity demanded falls to Qd but quantity supplied rises to Qs, creating a surplus equal to (Qs - Qd).

• (4) A tax on ammunition will increase the price of ammunition. Since guns and ammunition are complements in consumption, higher price of ammunition will lower the demand for guns, shifting demand curve leftward, decreasing price and decreasing quantity. In following graph, as demand shifts left to D1, it intersects S0 at point B with lower price P1 & lower quantity Q1.
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