Suppose you are an aide to a U.S. Senator who is concerned about the impact of a recently proposed excise tax on the welfare of her constituents. You explained to the Senator that one way of measuring the impact on her constituents is to determine how the tax change affects the level of consumer surplus enjoyed by the constituents. Based on your arguments, you are given the go-ahead to conduct a formal analysis, and obtain the following estimates of demand and supply. Don’t worry if the answers are in fractions.
Qd = 500 – 5P and Qs = 3P – 60
a) If a $2 excise tax is levied on this good, what will happen to the equilibrium price and quantity?
b) What will the consumer surplus be after the tax?
c) How much tax revenue will be raised following the $2 tax?
d) Producer’s surplus:
e) Deadweight Loss
This question belongs to micro economics and discusses about equilibrium price, tax revenue, Producer’s surplus and Deadweight Loss in market.
Total Word Count 133
Download Full Solution