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Elasticity and Government Excise Tax Revenue

Elasticity and Government Excise Tax Revenue. Activity 21. Remember this exercise: with the elasticity of demand for the good similar to the elasticity of supply. .50. What is the equilibrium price? $.25 What is the equilibrium quantity? 200

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Elasticity and Government Excise Tax Revenue

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  1. Elasticity and Government Excise Tax Revenue Activity 21

  2. Remember this exercise: with the elasticity of demand for the good similar to the elasticity of supply .50 What is the equilibrium price? $.25 What is the equilibrium quantity? 200 What is the consumer surplus at equilibrium? ((.45-.25)x200)/2 = 20 What is the producer surplus at equilibrium? ((.25-.05)x200)/2 = 20 Assuming this is a competitive market, In what way is this efficient? Consumer and Producer Surplus are equal and at their maximum MSB = MSC .45 .40 .35 S .30 .25 .20 .15 D .10 .05 50 100 150 200 250 300

  3. What is the new equilibrium price? $.325 What is the new equilibrium quantity? 125 What is the consumer surplus at the new equilibrium? .45-.32.5=.125 (.125x125)/2 = $9.375 What is the producer surplus at the new equilibrium? .175-.05=.125 (.125x125)/2 = $9.375 Assuming this is a competitive market, In what way is this efficient? It’s not!!! Although consumer and producer surplus are equal, 75 units of output are lost Now let’s put that tax in place .50 .45 S1 .40 .35 S .30 .25 .20 .15 D .10 .05 50 100 150 200 250 300

  4. Total Revenue or PxQ = $50.00 (.25 x 200) at initial equilibrium .50 .45 .40 supply .35 .30 .25 .20 demand .15 Total revenue received by sellers At equilibrium .10 .05 50 100 150 200 250 300

  5. After Government Excise Tax of $.15, total revenue(.325 x 125)=$40.625 .50 S1 supply+tax .45 .40 supply .35 .30 $40.625 Total Revenue available after tax is levied; lost revenue to the sellers is $50- 21.875 = $28.125 Less the $9.375 tax paid = $18.75 .25 .20 $ .25 x 75 = 18.75 uncollected demand .15 .10 .05 50 100 150 200 250 300

  6. Government Excise Tax Revenue = $18.75 (.15 x 125) .50 S1 supply+tax .45 .40 Consumers pay .075 in higher prices (.325-.25) Or a total of$9.375 of the tax supply .35 .30 Government Excise Tax Revenue = $18.75 ((.325-.175)x125) or (.15 x 125) .25 .20 demand .15 Sellers pay .075 in the form of lost revenue (.25-.175) Or a total of $9.375 of the tax .10 .05 50 100 150 200 250 300

  7. PART A (Figure 21.3) Relatively Inelastic Demand to Supply .50 S1 supply+tax .45 .40 supply .35 .30 .25 .20 demand .15 .10 .05 50 100 150 200 250 300

  8. PART A (Figure 21.3) Relatively Inelastic Demand to Supply .50 S1 supply+tax .45 .40 supply .35 .30 $52.5 Total Revenue available after tax is levied; revenue gained is $52.0- 50 = $2.5 lost revenue to the sellers is $50- 30 = $20.00 Less the $7.5 tax paid = $12.5 .25 .20 $ .25 x 75 = 12.5 uncollected demand .15 .10 .05 50 100 150 200 250 300

  9. PART A (Figure 21.3) Relatively Inelastic Demand to Supply .50 S1 supply+tax .45 Consumers pay .10 in higher prices (.35-.25) Or a total of$15.00 of the tax .40 supply .35 Government Excise Tax Revenue = $22.50 ((.35-.20)x150) or (.15 x 150) .30 .25 .20 Sellers pay .075 in the form of lost revenue (.25-.175) Or a total of $7.50 of the tax demand .15 .10 .05 50 100 150 200 250 300

  10. PART B (Figure 21.4) Relatively Elastic Demand to Supply .50 S1 supply+tax .45 .40 supply .35 .30 .25 demand .20 .15 .10 .05 50 100 150 200 250 300

  11. PART B (Figure 21.4) Relatively Elastic Demand to Supply .50 S1 supply+tax .45 Consumers pay .05 in higher prices (.30-.25) Or a total of$5.00 of the tax .40 supply .35 .30 .25 Government Excise Tax Revenue = $15.00 ((.30-.15)x150) or (.15 x 100) demand .20 .15 Sellers pay .10 in the form of lost revenue (.25-.15) Or a total of $10 of the tax .10 .05 50 100 150 200 250 300

  12. PART B (Figure 21.4) Relatively Elastic Demand to Supply .50 S1 supply+tax .45 .40 supply .35 .30 $30. Total Revenue available after tax is levied; lost revenue to the sellers is $50 - 15 = $35 Less the $10 tax paid = $25 .25 demand .20 .15 $ .25 x 100 = $25 uncollected .10 .05 50 100 150 200 250 300

  13. PART C (Figure 21.5) Perfectly Inelastic Demand .50 S1 supply+tax .45 .40 supply .35 .30 .25 .20 .15 .10 demand .05 50 100 150 200 250 300

  14. PART C (Figure 21.5) Perfectly Inelastic Demand .50 Consumers pay .15 in higher prices (.40-.25) Or a total of$30. of the tax S1 supply+tax .45 .40 supply .35 Government Excise Tax Revenue = $30 ((.40-.25)x200) or (.15 x 200) .30 .25 .20 Sellers pay 0 in the form of lost revenue Or $0 of the tax .15 .10 $80 Total Revenue available after tax is levied; 0 is uncollected demand .05 50 100 150 200 250 300

  15. PART D (Figure 21.6) Perfectly Elastic Demand .50 S1 supply+tax .45 .40 supply .35 .30 .25 demand .20 .15 .10 .05 50 100 150 200 250 300

  16. PART D (Figure 21.6) Perfectly Elastic Demand .50 S1 supply+tax .45 Consumers pay 0 in higher prices Or a total of $0 of the tax .40 supply .35 .30 .25 demand Government Excise Tax Revenue = $7.5 ((.25-.15)x50) or (.15 x 50) .20 .15 Sellers pay $7.5 in the form of lost revenue ((.25-.10)x50) Or a total of all $7.5 of the tax .10 .05 50 100 150 200 250 300

  17. PART D (Figure 21.6) Perfectly Elastic Demand .50 S1 supply+tax .45 .40 supply .35 .30 .25 $12.5 Total Revenue available after tax is levied; lost revenue to the sellers is $50 - 5 = $45 Less the $5 tax paid = $37.5 demand .20 .15 $ .25 x 150 = $37.5 uncollected .10 .05 50 100 150 200 250 300

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