a. De?ne the deadweight loss of a unit excise tax on a particular good. What determines its size? Be as complete and speci?c as possible.
b. In a particular competitive market, the industry’s private marginal cost at output level Q ≥ 0 is PMC(Q) = 1 (in $ per unit) when Q ≤ 11 and PMC(Q) = 2Q − 11 when Q > 11. The height of the demand curve for the industry’s output is 7−(Q/3) when the quantity demanded is Q ≤ 21. Draw the supply and demand curves and ?nd the competitive equilibrium price and quantity traded when there is no tax. Show all your work and explain all your steps.
c. In the market of part b, suppose that an excise tax of $1.40 per unit is charged to the sellers. Find the e?ect on the equilibrium quantity traded and the market price. Find the e?ective (after-tax) price received by the sellers. Compare the buyers’ burden from the tax to the sellers’ burden. Explain why the burdens are distributed the way they are.
d. Suppose that an excise tax of $2.80 per unit is charged to the buyers in the market of part b. Find the e?ect on the equilibrium quantity traded and market price. Find the e?ective (after-tax) price buyers pay. Compare the buyers’ burden from the tax to the sellers’ burden. Explain why the burdens are distributed the way they are and compare the burdens to those in part c.
e. The market in part b is probably most similar to the market for which of the following? (e1) gasoline in NY State during a year; (e2) tablets of a generic medication produced by more than 20 ?rms during a two-year period; (e3) wholesale fresh tuna on a typical day in Boston. Explain why the supply and demand curves in the market you pick could look like the ones in part c and why the curves in the other markets probably do not.
f. Find the deadweight loss from the taxes in parts c and d, assuming that there are no externalities associated with trading in this market. Find the total tax revenues (equal to the tax per unit times the number of units sold when the tax is imposed). Find the deadweight loss as a percentage of the total tax revenue. Show and explain all your work.
g. Suppose instead that there is a negative externality associated with the consumption of the good in the market in part b. Draw a graph showing how the deadweight loss from the tax in part c could be negative in this case. Explain how your graph shows this.