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Excise Tax

And Allocative Efficiency

Effect of a $.15 Excise Tax


.50 .45
Quantity Supply Price Before Tax Supply Price After Tax

.40
.35 .30 S

50 100

$.10 .15

.25
.20 .15 .10 .05

150
200 250 300
50 100 150 200 250 300

.20
.25 .30 .35

Effect of a $.15 Excise Tax


.50 .45 S1
Quantity Supply Price Before Tax Supply Price After Tax

.40
.35 .30 S

50 100 150 200 250 300


50 100 150 200 250 300

$.10 .15 .20 .25 .30 .35

.25 .30 .35 .40 .45 .50

.25
.20 .15 .10 .05

Suppose the elasticity of demand for the good is similar to the elasticity of supply
.50 .45 What is the equilibrium price?

.40
.35 .30 S

What is the equilibrium quantity?


What is the consumer surplus at equilibrium?

.25
.20 .15 .10 .05 D

What is the producer surplus at equilibrium?


Assuming this is a competitive market, In what way is this efficient?

50

100

150

200

250

300

Now lets put that tax in place


.50 .45 S1 What is the new equilibrium price?

.40
.35 .30 S

What is the new equilibrium quantity?


What is the consumer surplus at the new equilibrium? What is the producer surplus at the new equilibrium? D Assuming this is a competitive market, In what way is this efficient?

.25
.20 .15 .10 .05

50

100

150

200

250

300

Deadweight loss to society


.50 .45 S1 What is the new equilibrium price?

.40
.35 .30 S

What is the new equilibrium quantity?


What is the new equilibrium price paid by consumers? What is the new equilibrium price paid to producers? D What is the revenue generated for the government?

.25
.20 .15 .10 .05

50

100

150

200

250

300

Part B
.50 .45

.40
.35 .30 S

.25
.20 D .15 .10 .05

Who bears the burden of the tax when demand is more elastic than supply? (supply is more inelastic than demand?)

50

100

150

200

250

300

Part B
.50 .45 S1

.40
.35 .30 S

.25
.20 .15 .10 .05 D

Who bears the burden of the tax when demand is more elastic than supply? (supply is more inelastic than demand?)

50

100

150

200

250

300

Part C
.50 .45

.40
D .35 .30 S

Who bears the burden of the tax when demand is perfectly inelastic?

.25
.20 .15 .10 .05 What about a price floor or ceiling?

50

100

150

200

250

300

Part C
.50 .45 S1 D .35 .30 S

.40

Who bears the burden of the tax when demand is perfectly inelastic?

.25
.20 .15 .10 .05 What about a price floor or ceiling?

50

100

150

200

250

300

Part D
.50 .45

.40
.35 .30 S

Who bears the burden of the tax when demand is perfectly elastic?

.25
D .20 .15 .10 .05

What about a price floor or ceiling?

50

100

150

200

250

300

Part D
.50 .45 S1

.40
.35 .30 S

Who bears the burden of the tax when demand is perfectly elastic?

.25
D .20 .15 .10 .05

What about a price floor or ceiling?

50

100

150

200

250

300

Effect of a $.15 Excise Tax


.50 .45

.40
S .35 .30

Who bears the burden of the tax when supply is perfectly inelastic?

.25
.20 D .15 .10 .05 What about a price floor or ceiling?

50

100

150

200

250

300

Effect of a $.15 Excise Tax


.50 .45 P

.40
S1 .35 .30 S

Who bears the burden of the tax when supply is perfectly inelastic?

.25
.20 D .15 .10 .05 What about a price floor or ceiling?

50

100

150

200

250

300

Effect of a price ceiling or floor?


.50 .45

.40
S .35 .30P

Who bears the burden of the tax when supply is perfectly inelastic?

.25
.20 D .15 .10 .05 What about a price floor or ceiling?

50

100

150

200

250

300

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