Week 5 Flashcards
What 3 set of questions will we answer in this set of flashcards?
- Should we tax consumers or producers? 2
. Tax incidence/burden: Who suffers more from taxes?
- What is the best way for the government to raise tax revenues?
Lets say Qs = P and Qd = 100-p draw the equlibrium before tax?
Qs = p (the slope is 1) and Qd = 100-p (when p is 0 Qd is 100 when Qd is 0 p =100)
Equare p=100-p
0=100-2p
-100=-2p
p = 50
sub in normal equation
100 - 50 = 50
Q =50
Now lets say the government taxes sellers t =10 on each unit of production. So each unit they sell for a price of p they need to pay 10 to the government.
Draw the graph. considering that previously Qs = p and Qd = 100-p?
There is a shift upwards of supply
Now lets say the government taxes sellers t =10 on each unit of production. So each unit they sell for a price of p they need to pay 10 to the government.
Draw the graph. considering that previously Qs = p and Qd = 100-p?
Now what does the governement get and producer and consumer surplus and describe the graph?
so the price the consumer pays is 55 and the producer gets 45 for every unit sold the difference is the tax
Production has decreased from 50 to 45
p-10 = 100-p
2p = 110
p =55
q =45
Now lets say the government taxes sellers t =10 on each unit of production. So each unit they sell for a price of p they need to pay 10 to the government.
Draw the graph. considering that previously Qs = p and Qd = 100-p?
Who is paying more consumers or producers, calculate tax incidence and what is the deadweight loss to society?
THE tax incidence is the same. To calculate tax incidence on consumers it is always above equibirum price and before tax on consumers
To calculate tax incidence on producers it is the rectangle below price before tax on producers.
The deadweight loss is the area of the traingle
10 x 5/2 = 25
So for a tax on sellers, the incidence of tax is what?
The same
Suppose that the government taxes Consumers t=10 on each unit they buy. So each unit they buy for a price of p they need to pay 10 extra to the government.
draw diagram and what do producers get and consumers?
The demand curve used to be Qd = 100-p but now consumers pay an extra 10 for each unit so pay 100-(p+10) = 90-p
Find new equlibirum Qd = 90-p = p
2p = 90
p = 45
Q = 45
Consumers pay 55 and producers get 45
Demand has shifted left and Q has reduced
Suppose that the government taxes Consumers t=10 on each unit they buy. So each unit they buy for a price of p they need to pay 10 extra to the government.
Who pays more consumers or producers calculate incidience of tax? and what is the tax revenue
Tax revenue = 10 x45
The tax incidence is the same
What is the first lesson we can see when we tax buyers and sellers?
The incidence of tax in a competitive market does not depend upon whether the tax is imposed on buyer or seller
Now lets look at an inelastic demand slope ( in the question you might have can spot it by looking at the p’s and seeing the slope)
so Qs = P
and Qd = 75-p/2
Draw the diagram finding equilibrium p and q?
What can we see already?
When p = 0 Qd = 75 when Qd = 0 p = 150 thats the demand function
Qd = P is just a upward positive function
Find equilibrium
P = 75-P/2
2P=150-P
3P = 150
P = 50
q = 50
The producer and consumer surplus is not equal.
Now lets look at an inelastic demand slope ( in the question you might have can spot it by looking at the p’s and seeing the slope)
so Qs = P
and Qd = 75-p/2
Draw the diagram finding equilibrium p and q?
Now lets say again their is a tax on producers of t=10, workout equilbrium price and Q?
P-10 = 75-p/2
2p-20 = 150-p
3p =170
p =57
Q = 47
Producers get 47 and consumers pay 57
Now lets look at an inelastic demand slope ( in the question you might have can spot it by looking at the p’s and seeing the slope)
so Qs = P
and Qd = 75-p/2
Now lets say again their is a tax on producers of t=10 work out who pays more the producers or consumers?
Calculate Deadweight loss?
57-50 = 7 X 47 = 329
3x 47 = 141
Deadweight loss:
Area of triangle 3 X 10/2
=15
What is lesson 2?
When demand is relatively more inelastic than supply, consumers bear a greater share of tax incidence than producers
Lets say I have a perfectly inelastic Qs and a tax on producers of t=10 what would happens to revenue?
If there is a tax on producers t=10, this will shift upwards and have no difference in the Quanitiy consumed, this means higher revenue, as the quanitiy after the tax is changed the least here, vice versa with demand
What is lesson 3?
The revenue for the government will be highest, all things equal, when the there is little change in the consumption in the market after the tax
What was the governement goal of setting sugar tax ( midweek task)?
This is to reduce consumption of sugar based drinks, due to the increase obesity, it was put on producers, which means consumers pay more as they internalise the tax as well.
What was the problem of Sugar based drinks and taxing them?
Due to high subsituability , demand is very elastic as there are many subsitutes which arer not taxed, so they can change consumption and get the same level of utlitiy
What is a lump sum tax?
One time tax on producer, the mc curve stays the same, output stays the same, but the ATC increases, so profit reduces.
The MC doesn’t change as the additional to total cost is the same
Do lump sum taxes have deadweight loss?
Lump sum taxes are considered to have little to no deadweight loss because the price has not changed, but profits have, so there is a change in PS not CS, there is no loss to society as Q has stayed the same.
How does the notion of Lump sum taxes link to the second welfare theorem?
Because it increases Fixed costs and doesn’t change Q, it reduces firms profits meaning you can redistrubute the income raised and cross subsisdies bigger companies with smaller ones, so smaller ones get a subsisdy, changing the endownment, thus can trade and compete with bigger companies, allowing for them to reach a pareto efficient outcome.
Who was Poll tax introduced by?
Maragret Thracter
What was poll tax?
It was known as community charge tax, in which the local government charged a single rate for everyone, regardless of income, thatcher thought that this would have achieved equity and effcicency advantages to the local property taxes.
Before the introduction of Poll tax, what was there before?
Before they raised money via property tax, the value of your property, so if you were a property holder, you didn’t pay tax, but poll tax meant everyone over 18 had to pay it.
Suppose that supply in a market is Qs = p − 2, and demand Qd = 10 − p. Which of the following is true in a competitive equilibrium?
A. The equilibrium price is 4.
B. The equilibrium price is 6.
C. The quantity supplied is 2.
D. The quantity supplied is 6.
E. Total surplus is 16.
P-2= 10-P
P = 6
Q = 4
Qs = p-2 ( when Qs is 0 p =2, you see that P is not on 0)
Qd= 10-p ( when p = 0 Qd =10, when Qd = 0 P = 10)
PS = 6-2 = 4 x4/2 = 8
CS = 10-6 =4 X 4/2 = 8
TS = 8+8 = 16
The original Qd = 10 - p and Qs = p-2
Lets say the governement subsidies lunches is thinking of paying pubs one pound for any lunch they sell.
Show new equibrium price and Q
What is the CS and PS before and after subsisdy
p+1-2 = P-1 The supply curve shifts right
10 - P = (P+1) - 2
10 -P = P-1
-2P=-11
P = 5.5
Q=4.5
Before PS = 8 and CS = 8
With subsidy PS = (6.5-2 x4.5/2)10.125 and CS = (10-5.5 = 4.5 X4.5/2) = 10.125
So as you can see consumer surplus has gone up and producer surplus
The total the pub gets for any lunch sold is 6.5 and the consumers pay 5.5
The original Qd = 10 - p and Qs = p-2
Lets say the governement subsidies lunches is thinking of paying pubs one pound for any lunch they sell.
Show new equibrium price and Q
What is the CS and PS before and after subsisdy
so how much did the government have to pay for this?
Well orginally yes from 8 to 10.125 for both producer and consumer from start to finish but the government had to pay for subsidy the goverment pay 1 X 4.5 that is the whole rectangle the government has to pay
The original Qd = 10 - p and Qs = p-2
Lets say the governement subsidies lunches is thinking of paying pubs one pound for any lunch they sell.
Show new equibrium price and Q
What is the CS and PS before and after subsisdy
so did total surplus go up?
The net between what the governement paid and the consumer and producer surplus before subsidy is the deadweight loss by which total surplus went down by. We lost from this transcation . so the cost did not justify the scheme, in the sense of total surplus.
What is an easier way to understand deadweight loss on subsidy? Describe 1 and 2?
1) If we produce here than it is rational to produce more as the marginal beneifit is > cost of producing the next unit.
2) If we produce here the cost is greater than benefit thus is a negative input in the total surplus, thus there is a triangle signifying a loss to society, from having an allocation too big.
Suppose that supply in a market is Qs = 5, and demand Qd = 10 − p. Which of the following is true in a competitive equilibrium?
Select one or more:
a. The equilibrium price is 1.
b. The equilibrium price is 5.
c. The quantity demanded is 10.
d. Consumer surplus is 5.
e. Producer surplus is 25.
A and e
Suppose that supply in a market is Qs = 5, and demand Qd = 10 − p. The government imposes a per-unit tax of 0.5 on buyers. Which of the following is true?
Select one or more:
a. Imposition of the tax does not change the price in this market.
b. Imposition of the tax does not change the quantity sold in this market.
c. Consumers bear all the burden of the tax.
d. Producers bear all the burden of the tax.
e. The burden of the tax is shared between consumers and producers.
5 = 10-p + 0.5
5=10-p + 0.5
p = 5.5
We know that Quantity doesn’t change so the price that consumers get don’t change (5-0.5+5) but the price producers get don’t change so the CS is 5 X5 /2 = 12.5 which is the same before tax
The producer surplus is 4.5 X 5 = 22.5 the PS went down from 25 to 22.5 so the producer bears all the cost of the tax.
So B and D are correct
Suppose that supply in a market is Qs = 5, and demand Qd = 10 − p. Instead of taxing buyers, the government now imposes a per-unit tax of 0.5 on producers. Which of the following is true?
Select one or more:
a. Imposition of the tax does not change the price in this market.
b. Imposition of the tax does not change the quantity sold in this market.
c. Consumers bear all the burden of the tax.
d. Producers bear all the burden of the tax.
e. The burden of the tax is shared between consumers and producers.
The Qs will shift upwards
A B and D
What is the supply for T bridge when the lowest price is $10 m?
You supply 1 painitng and you are not willing to sell less than 10 mil or at it. any price above you are willing to sell, there is only 1 painiting so supply curve below 10 m is 0 (perfectly inelastic
What is the demand for T bridge?
Happiness of buyer from buying the painting
What is the Consumer and Producer surplus of T bridge?
THE painting was sold for 15.4 mil but in pic it says 16.9, this is because we have not added commission
Now lets say we introduce a 10% commision on seller ( a commision is like a tax, but proceeds go to the Auction house), how would diagram look
so if you think about it they had 11.1 but had to pay 10% which equals $10 m
Now lets say we introduce a 10% commision on buyer ( a commision is like a tax, but proceeds go to the Auction house), how would diagram look
The buyer understands they have to pay 10% more
What is the equilbrium when we put 10% commision on buyer and seller?
The price is now 15.4 but without commision it was 16.9, as it is 10% lower
What is the producer surplus before commision, after commision?
In this question, we consider the market for micro-beer. Suppose that supply in this market is given by Qs = p/3, and the demand by Qd = 100 − p. The government is worried about the consumption of alcohol. In particular, it wants to reduce micro-beer consumption and to raise some money to treat alcoholism. One proposal is to tax micro beer, but there is a debate about what is the best way to do this. The government calls you to get your opinion about this. The government considers three proposals: (A) Impose a tax on consumption of 10 per unit. (B) Impose a 10 per unit tax on production and (C) Both a 5 per unit tax on consumption as well as a 5 per unit tax on production.
A. As a first step, calculate the equilibrium price and the quantity consumed in the market with no government intervention.
In this question, we consider the market for micro-beer. Suppose that supply in this market is given by Qs = p/3, and the demand by Qd = 100 − p. The government is worried about the consumption of alcohol. In particular, it wants to reduce micro-beer consumption and to raise some money to treat alcoholism. One proposal is to tax micro beer, but there is a debate about what is the best way to do this. The government calls you to get your opinion about this. The government considers three proposals: (A) Impose a tax on consumption of 10 per unit. (B) Impose a 10 per unit tax on production and (C) Both a 5 per unit tax on consumption as well as a 5 per unit tax on production.
B. Calculate the equilibrium price and the quantity consumed in the market under proposal A. How much money does the government raise with this proposal?
n this question, we consider the market for micro-beer. Suppose that supply in this market is given by Qs = p/3, and the demand by Qd = 100 − p. The government is worried about the consumption of alcohol. In particular, it wants to reduce micro-beer consumption and to raise some money to treat alcoholism. One proposal is to tax micro beer, but there is a debate about what is the best way to do this. The government calls you to get your opinion about this. The government considers three proposals: (A) Impose a tax on consumption of 10 per unit. (B) Impose a 10 per unit tax on production and (C) Both a 5 per unit tax on consumption as well as a 5 per unit tax on production.
C. Calculate the equilibrium price and the quantity consumed in the market under proposal B. How much money does the government raise with this proposal?
In this question, we consider the market for micro-beer. Suppose that supply in this market is given by Qs = p/3, and the demand by Qd = 100 − p. The government is worried about the consumption of alcohol. In particular, it wants to reduce micro-beer consumption and to raise some money to treat alcoholism. One proposal is to tax micro beer, but there is a debate about what is the best way to do this. The government calls you to get your opinion about this. The government considers three proposals: (A) Impose a tax on consumption of 10 per unit. (B) Impose a 10 per unit tax on production and (C) Both a 5 per unit tax on consumption as well as a 5 per unit tax on production.
D) Calculate the equilibrium price and the quantity consumed in the market under proposal C. How much money does the government raise with this proposal?
