Week 5, Discussion Excise Taxes 1. Suppose the demand and supply for soft drinks is: QD = 20 P S Q = 3P a.) Solve for the equilibrium price and quantity. Suppose the government imposes a per-unit tax of $4 on the sellers. b.) c.) d.) e.) Solve for the new quantity, the net price received by sellers, and the price paid by consumers. Calculate the government revenue from the tax. Calculate the deadweight loss resulting from the tax. What fraction of the economic incidence of the tax is borne by consumers? Suppose that instead of imposing the tax on the sellers, the government divides the nominal burden. Consumers must pay $1.11 per unit and suppliers must pay $2.89 per unit. f.) What fraction of the economic incidence of the new tax is borne by suppliers? 2. Consider the market for parking permits around campus. The demand and supply are given below. QD = 400 4P QS = 80 a.) Solve for the equilibrium price and quantity. Suppose a $5 excise tax is instituted. b.) Solve for the new prices and quantity. c.) Calculate the deadweight loss resulting from the tax. d.) What fraction of the economic incidence of the tax is borne by suppliers? Consider a diﬀerent supply curve, QS = p. e.) How does the economic incidence of the tax change? f.) How does government revenue change? International Trade, Tariﬀs 3. The small nation of Lilliput has an open economy and a competitive market for monster trucks. Let the world price for a monster truck be $101 . Domestic supply and demand for monster trucks is given below. QD = 500 5P QS = P5 a.) How many monster trucks will Lilliputians consume? b.) How many monster trucks will be imported in Lilliput? Suppose a $10 tariﬀ raises the price of an imported monster truck to $20 in Lilliput. c.) How many monster trucks will be consumed in Lilliput with the tariﬀ? d.) How many monster trucks are imported? e.) What is the deadweight loss resulting from the tariﬀ? 1 If it makes you feel better, pretend $1 scales to $10,000. 1 1. a.) Q=15, P=5 b.) Q=12, P_net=4, P_demanders=8 c.) Government revenue = $4*12 = $48 d.) DWL = $4*(3)/2 = $6 e.) 3/4 f.) 1/4, nothing changes 2. a.) Q=80, P=80 b.) Q=80, P_net=75, P_demanders=80 c.) DWL=0, only change is pure transfer from suppliers to government d.) 1 (100%) e.) In general terms, the burden will be split more evenly as the supply curve becomes more elastic. Consumers incur 1/5 of the new tax burden, suppliers 4/5. f.) Government revenue would fall. Quantity falls from 80 to 76, so the loss is $20. 3. a.) 450 b.) 448 c.) 400 d.) 396 e.) $250+$10 = $260