(Economic Welfare)

2. You work for a NM Committee that examines the economic welfare of consumers and suppliers. Your committee believes economic welfare is shared equally between consumers and producers:

= + +

There is a competitive market with the demand and supply functions below. You are tasked with explaining to your Committee members what the current economic welfare calculation is. You must a graph and show your calculations. Currently, there is no tax.

: = 10

: =

(Tax and Economic Welfare)

3. (Continuing from previous problem)

Now suppose NM is considering instituting a specific tax of $2 on suppliers to help fund local programs, so that : = 2. The new economic welfare calculation is

= + +

Or, we can also say the change in welfare

= + + = h

Explain to your Committee Members the expected economic welfare calculation using your graph (or a new one) and show your calculations. (Hint: you should show the price paid by consumers, price paid by sellers, and tax revenue; and show/discuss any deadweight loss). In addition, explain why a deadweight loss exists.