1)The demand and supply equations in a market are given as Q = 30 – 2P and Q = 10 + 2P. If the...

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1)The demand and supply equations in a market are given as Q = 30 – 2P and Q = 10 + 2P. If the government imposes a tax of $0.50/unit on the suppliers, what would be the net loss in consumer surplus and producer surplus? What would be the deadweight loss? Also compute consumer’s tax burden and consumer’s new expenditure.

2) a.Give an example of positive externality. Using a graph explain how the usual framework of marginal private benefit and marginal private cost leads to underproduction (less than optimal production) in this case.
b. Give an example of negative externality. Using a graph explain how the usual framework of marginal private benefit and marginal private cost leads to overproduction (more than optimal production) in this case.

David · Accepted Answer

1) Demand: Q = 30 – 2P and supply = Q = 10 + 2P 
Equating Demand = supply, we get,  
P* = 5 and Q
*
 = 20 
Now, total surplus = 0.5 × 20 × 20 = 200 
Now, after tax, t = 0.5Q 
1) The supply curve becomes: Q = 10 + 2(P – 0.5Q) 
Or, P = Q – 5 
Therefore total welfare = 13.33 × 0.5 × 20 = 133.3 
Dead weight loss = (200 – 133.3 – tax revenue) = (200 – 133.3 – 6.67) = 60.03 
Consumer’s new expenditure = 148 (approx) 
Consumer’s burden = 20 – 13.33 = 6.

1)The demand and supply equations in a market are given as Q = 30 – 2P and Q = 10 + 2P. If the government imposes a tax of $0.50/unit on the suppliers, what would be the net loss in consumer surplus...

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