In February 2003, Senator Don Perata of California proposed a tax on the manufacturers of disposable diapers.

The proposed bill would place a tax on each diaper sold. Sen. Perata has affirmed that the tax will be on manufacturers rather than on the already over-taxed residents of California. The goal of the policy is to raise $60 million to pay for local recycling programs in California.

As a member of board of the Alameda Taxpayers Association, you have been asked to evaluate the proposal using supply and demand analysis.

a) Draw a simple graph showing the equilibrium in the disposable diaper market before any policy action.Explain why this is an equilibrium.

b) Add to this diagram the proposed tax on paper diapers and explain what will happen to the equilibrium price and quantity. (Hints: Usually, taxes can be represented by a shift of the supply curve or the demand curve. Note that only one curve shifts, and only shift the curve for the party which faces the legal incidence. The shift represents the amount of the tax, and quantity falls after the tax.)

c) Illustrate on your diagram how much revenue will be raised by the paper diaper tax.

d) Who will bear the burden of this tax?Show this on the diagram.And discuss the factors affecting who will bear more of the burden of this fee.

e) What will determine the amount of reduction in the use of paper diapers caused by the tax on paper diapers?

2.Suppose that the demand for cigarettes is given by Q_D=2000-200P.The supply of cigarettes is Q_S=800P. (Hints: I discussed specific calculation steps in my lecture notes.)

a) Find the price and quantity of cigarettes, assuming that the market is competitive.

b) In an effort to reduce smoking, the government levies a tax of $1 per pack on producers. Compute the quantity of cigarettes after the tax, the price paid by consumers, and the price paid by producers.How much revenue does the government gain from the tax? (Reminder: don't forget to set the equations for P before graphing, as the vertical axis is P, not Q.)

c) Who bears the bigger economic burden - consumers or producers?Why?Would you expect this to be the case in real life?Why or why not?

d) Calculate the deadweight loss of the tax.