Economics 100

Computational Tax Worksheet

This is a chance for you to practice drawing a market with a per-unit tax and calculating results such as market outcome (price to consumers, price to suppliers, quantity exchanged, tax revenue, share of tax paid by consumers, share of tax paid by producers) and welfare analysis indicators (consumer surplus, producer surplus, total surplus, deadweight loss).

Suppose that the supply and demand for gadgets are given by these equations:

Supply: P = 50 + (1/3) Qs

Demand: P = 210 - 0.3 Qd

What happens in the market if the government enacts a $15 per unit tax on gadgets?

a.Draw a diagram that shows the market before and after the tax goes into effect, and show which areas represent CS, PS, TS, and DWL before and after the tax.

b.Compute the market outcome and the welfare analysis areas. Note: Your answers should go to the second decimal place. Do not round too early.