Excise Tax

And Allocative Efficiency

Effect of a $.15 Excise Tax

.10

.05

.20

.15

.50

.45

.40

.35

.30

.25

Quantity Supply Price

Before Tax

Supply Price

After Tax

50 $.10

100 .15

150 .20

200 .25

250 .30

300 .35

100 150 200 250 30050

S

Effect of a $.15 Excise Tax

.10

.05

.20

.15

.50

.45

.40

.35

.30

.25

Quantity Supply Price

Before Tax

Supply Price

After Tax

50 $.10 .25

100 .15 .30

150 .20 .35

200 .25 .40

250 .30 .45

300 .35 .50

100 150 200 250 30050

S

S1

Suppose the elasticity of demand for the good is similar to the elasticity of supply

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.05

.20

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100 150 200 250 30050

S

D

What is the equilibrium price?

What is the equilibrium quantity?

What is the consumer surplus at equilibrium?

What is the producer surplus at equilibrium?

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

Now let’s put that tax in place

.10

.05

.20

.15

.50

.45

.40

.35

.30

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100 150 200 250 30050

S

D

What is the new equilibrium price?

What is the new equilibrium quantity?

What is the consumer surplus at the new equilibrium?

What is the producer surplus at the new equilibrium?

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

S1

Deadweight loss to society

.10

.05

.20

.15

.50

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.40

.35

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100 150 200 250 30050

S

D

What is the new equilibrium price?

What is the new equilibrium quantity?

What is the new equilibrium price paid by consumers?

What is the new equilibrium price paid to producers?

What is the revenue generated for the government?

S1

Part B

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.15

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100 150 200 250 30050

S

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

D

Part B

.10

.05

.20

.15

.50

.45

.40

.35

.30

.25

100 150 200 250 30050

S

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

S1

D

Part C

.10

.05

.20

.15

.50

.45

.40

.35

.30

.25

100 150 200 250 30050

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

What about a price floor or ceiling?

S

Part C

.10

.05

.20

.15

.50

.45

.40

.35

.30

.25

100 150 200 250 30050

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

What about a price floor or ceiling?

S

S1

Part D

.10

.05

.20

.15

.50

.45

.40

.35

.30

.25

100 150 200 250 30050

D

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

What about a price floor or ceiling?

S

Part D

.10

.05

.20

.15

.50

.45

.40

.35

.30

.25

100 150 200 250 30050

D

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

What about a price floor or ceiling?

S

S1

Effect of a $.15 Excise Tax

.10

.05

.20

.15

.50

.45

.40

.35

.30

.25

100 150 200 250 30050

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

What about a price floor or ceiling? D

Effect of a $.15 Excise Tax

.10

.05

.20

.15

.50

.45

.40

.35

.30

.25

100 150 200 250 30050

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

What about a price floor or ceiling? D

S1

P

Effect of a price ceiling or floor?

.10

.05

.20

.15

.50

.45

.40

.35

.30

.25

100 150 200 250 30050

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

What about a price floor or ceiling? D

P