The market for meat pies is characterised by a downward-sloping demand curve and an upwardsloping supply curve.

a Draw the competitive market equilibrium. Label the price, quantity, consumer surplus and producer surplus. Is there any deadweight loss? Explain.

b Suppose that the government forces each pie shop to pay a $1 tax on each pie sold. Illustrate the effect of this tax on the pie market, being sure to label the consumer surplus, producer surplus, government revenue and deadweight loss. How does each area compare with the pre-tax case?

c If the tax were removed, pie-eaters and sellers would be better off, but the government would lose tax revenue. Suppose that consumers and producers voluntarily transferred some of their gains to the government. Could all parties (including the government) be better off than they were with a tax? Explain using the labelled areas in your graph.