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Q1: Suppose the government is to impose a tax of $1 per unit on the transaction of the good. We don't know yet whom the government will impose the tax on. We do know that the tax will generate a $1 wedge between the net price consumers pay and the net price producers receive. Price The $1 taxis shown here as the red line. To allow for the $1 wedge between consumer and producer prices, one tucks the red line between the demand and supply cones. There aretwo placesin thediagram thatthe red line will fit: one is to the left ofthe current equilibrium point [9), and the other isto the right. The choice should besuch that the net price consumer pay is greaterthanthenetpriceproducersrecelveby exactly $1. There has to be $1 left over for the government to collect as tax. (ii) From there, identify on the diagram the net price consumers pay and the net price producers receive. Denote the Mo prices by Pc and Pp, respectively. (iii) Given (ii), who hear the tax burden? Consumers? Producers? Both? Answer: (iv) Who bears more of the tax burden? Consumers? Producers? Equally? Answer: (v) In the next chapter, you will learn that the way the tax burden is shared (in a competitive market) is determined by the \"steepness\" of the supply and demand curves. (vi) 0n the diagram, identify the equilibrium quantity under the tax regime. Denote it by Q'\". Q2: Taxing the Consumers: As in Q3, the government is to impose a tax of $1 per unit on the transaction of the good. But now we know that the tax is to be imposed on consume rs. Price Withaoonsumertax of$1perunit. the MBu-vewill shift down bySl. This is because the benet from consumption is reduced by $1 dueto the consumption tax. {ii} Identiy the new equilibrium point and denote it as ('1 on the diagram. {iii} From 0, identify the new equilibrium price and denote it as P9 on the price axis. This is the price that consumers pay producers under this tax regime. Next, consumers will pay taxes! {iv} Starting at Point (I, draw a vertical dash line upwardly until it hits the original demand curve [i.e., the demand curve without tax]. Denote that point as I. {v} Starting at Point 2, draw a horizontal dash line toward the price axis and denote the associated price as P'. This is the total price that consumers pay, which is the sum of the price consumers pay producers {PF} and the tax consumers pay Uncle Sam {$1}. {vi} P'-P"=? {A} A random number (B) The tax amount (C) 51 [D] Both B and C are correct. Answer: Q3: Taxing the Producers: Similar to Q4, the government is to impose a tax of $1 per unit on the transaction of the good. But, this time the tax is to be imposed on producers. Price Supply = MC With a producer tax of $1 per unit, the MC curve will shift up by $1. $5 This is because the cost of production is increased by $1 due to the production tax. Demand = MB Quantity (ii) Identify the new equilibrium point and denote it as Q on the diagram. (iii) From Q, identify the new equilibrium price and denote it as Pc on the price axis. This is the price that consumers pay producers under this tax regime. Next, producers will pay taxes. (iv) Starting at Point Q, draw a vertical dash line downwardly until it hits the original supply curve (i.e., the supply curve without tax). Denote that point as E. (v) Starting at Point E, draw a horizontal dash line toward the price axis and denote the associated price as PP. This is the net price that producers receive, which is the difference between the price received from consumers (Pc) and the tax producers pay Uncle Sam ($1). (vi) pc - PP = ? (A) A random number (B) The tax amount (C) $1 (D) Both B and Care correct. Answer:C14: The equivalency between taxing consumers and taxing producers Let's summarize what we learn in C11, C12 and C13. lil {ii} In C12 where the tax is imposed on consumers, we learn that: The consumer tax has the effect of shifting the demand curve (up I down} by the amount of the tax. Answer: The new 5&0 intersection point gives us the market price that consumers pay producers. Consumers still need to pay the tax, effectively (increasing I reducing) their total price paid by that amount. Answer: From C12, what is the expression for the consumers' tax burden {per unit]? Answer: - From C12, what is the expression for the producers' tax burden (per unit)? Answer: - In C13 where the tax is imposed on producers, we learn that: The producer tax has the effect of shifting the simply curve [up I down) by the amount of the tax. Answer: The new 5&D intersection point gives us the m price that consumers pay producers. Producers still need to pay the tax, effectiver [increasing I reducing) their net price received by that amount Answer: From C13, what is the expression for the consumers' tax burden {per unit]? Answer: - From C13, what is the expression for producers' tax burden {per unit}? Answer: - Thus, as far as the effect on consumer and producer prices are concerned, there is an equivalency between taxing the consumers and taxing the producers. Further, from the much simpler analysis in C11, we see clearly that the tax has the effect of creating a P W beMeen the net price consumers pay and the net price producers receive, with the difference being the amount of the Answer1:P W Answer2:T