Tax on Producers and Consumers
Question 1
Figure 1.1- A tax on Producers
a) i) Equilibrium Price and Quantity before tax:
100-10Q = 20 +10Q
∴ 20Q = 80
∴ Q = 4
When Q = 4, P = 60
∴ Equilibrium price equals $60 and equilibrium quantity is 4 million
ii) Consumer Surplus = ½ x 4 x 40
= 80
Producer Surplus = ½ x 4 x 40
= 80
iii) An efficient market occurs when total surplus is maximized. This equilibrium of P = 60 and Q = 4 has maximized consumer and producer surplus equally. It is at this point where the marginal cost of production equals marginal benefit.
Question 1 cont.
b) i) After imposing a tax of $20, being levied on the producers, the price paid by buyers is $70 and the price received by sellers is $50 per unit of mobile phones sold at the reduced quantity supplied of 3 million. This is illustrated in figure 1.1 with the shift in the supply curve from S1 to S2.
ii) Consumer Surplus = ½ x 3 x 30
= 45
Producer Surplus = ½ x 3 x 30
= 45
iii) There is a decrease in the total surplus after the implementation of a tax on mobile phones. A substantial portion of the total surplus has been redistributed to government tax revenue, however, there is a deadweight loss. Marginal social benefits exceed marginal social costs, resulting in inefficiencies within the market for mobile phones.
c) Expected Total Revenue = 3 x 20
= $60 million
Expected Deadweight Loss = 2 ( ½ x 1 x 10 )
= $10 million
d) The distribution of real incidence is the amount of burden of a tax shared between the buyer and seller. This proposed tax shares the burden of the $20 equally between buyers and sellers. The distribution of real incidence on buyers is a $10 rise in the price paid on sellers is
Figure 1.1- A tax on Producers
a) i) Equilibrium Price and Quantity before tax:
100-10Q = 20 +10Q
∴ 20Q = 80
∴ Q = 4
When Q = 4, P = 60
∴ Equilibrium price equals $60 and equilibrium quantity is 4 million
ii) Consumer Surplus = ½ x 4 x 40
= 80
Producer Surplus = ½ x 4 x 40
= 80
iii) An efficient market occurs when total surplus is maximized. This equilibrium of P = 60 and Q = 4 has maximized consumer and producer surplus equally. It is at this point where the marginal cost of production equals marginal benefit.
Question 1 cont.
b) i) After imposing a tax of $20, being levied on the producers, the price paid by buyers is $70 and the price received by sellers is $50 per unit of mobile phones sold at the reduced quantity supplied of 3 million. This is illustrated in figure 1.1 with the shift in the supply curve from S1 to S2.
ii) Consumer Surplus = ½ x 3 x 30
= 45
Producer Surplus = ½ x 3 x 30
= 45
iii) There is a decrease in the total surplus after the implementation of a tax on mobile phones. A substantial portion of the total surplus has been redistributed to government tax revenue, however, there is a deadweight loss. Marginal social benefits exceed marginal social costs, resulting in inefficiencies within the market for mobile phones.
c) Expected Total Revenue = 3 x 20
= $60 million
Expected Deadweight Loss = 2 ( ½ x 1 x 10 )
= $10 million
d) The distribution of real incidence is the amount of burden of a tax shared between the buyer and seller. This proposed tax shares the burden of the $20 equally between buyers and sellers. The distribution of real incidence on buyers is a $10 rise in the price paid on sellers is