Problem
Table 20P-1 shows supply and demand in the market for sub sandwiches in Where town, where the local government wants to raise revenue via a $1 tax on all sandwiches, collected from sandwich shops.
a. Graph supply and demand. Before and after the tax: What is the equilibrium quantity? What price is paid by consumers? What price is received by suppliers?
b. Calculate consumer and producer surplus before and after the tax.
c. How much tax revenue does Where town receive?
d. How much deadweight loss is caused by the tax?
e. Suppose it costs Where town $35 to collect the tax revenue from sub shops. In the end, how much revenue from the sub tax is actually available to spend on public services?
Table 20P-1
|
Price of sub
sandwich ($)
|
Quantity demanded
|
Quantity supplied
|
|
8.00
|
0
|
100
|
|
7.50
|
10
|
90
|
|
7.00
|
20
|
80
|
|
6.50
|
30
|
70
|
|
6.00
|
40
|
60
|
|
5.50
|
50
|
50
|
|
5.00
|
60
|
40
|
|
4.50
|
70
|
30
|
|
4.00
|
80
|
20
|
|
3.50
|
90
|
10
|
|
3.00
|
100
|
0
|
|
2.50
|
110
|
0
|
|
2.00
|
120
|
0
|