Question
In Iceland, demand and supply for television use (pay per view) by choice is described by the following demand and supply functions (v represents price
In Iceland, demand and supply for television use (pay per view) by choice is described by the following demand and supply functions (v represents price per item)
Demand = 198 - 2v
Supply = -2 + 2v
The world market price for TV use is ISK 30. Price per item.
a) Calculate and draw a balance on a picture
i) if no foreign trade is allowed and foreign providers are excluded by excluding IP addresses.
(ii) if 14% VAT is levied on domestic broadcasters and foreign trade is prohibited. The tax is collected by consumers (no collection costs). What is the welfare loss from the tax? Show a picture.
iii) how is the tax burden divided into point ii) and what are its explanations?
b) Domestic tech nerds have avoided technical barriers to using foreign streaming services (VPN gymnastics) and the government does not have the ability to collect VAT on that use and subsequently decide to stop collecting VAT on domestic use: Calculate domestic production, domestic consumption and import. Draw a picture and calculate and benefit from the opening of a business (pretend that there was no VAT for freedom).
c) Due to the pressure of special interest groups of domestic producers, a decision is now made to impose a 30% duty on the world market price of imports (foreign streaming services), but the government has now found that traditional duty can be collected through credit card companies' transactions (no VAT).
i) What will be the price, imports, demand and domestic supply.
ii) How does producer and consumer profit change from point b)?
iii) What will be the macroeconomic loss due to duty compared to free trade without VAT?
update:
I figured the answers to a, but can you help me with b and c. The answers to a is here:
a)
demand,q1 = 198-2v
supply, q2=-2+2v, where v is the price per item.
in equilibrium, demand, q1 =supply of the television use,q2
198-2v=-2+2v
v=50
q=98
ii) Since 14% VAT is induced, it will affect the supply curve- a 14% increment.
q2=-2+2v (supply )
=q2+14% of q2
=-2+2v + (-2 + 2v) *14/100
q2'=-2.28 + 2.28 v
iii) Tax burden is divided among the suppliers and consumers according to the price elasticity. More the demand elasticity and less the supply elasticity, the tax burden will fall on suppliers than suppliers. The more the supply elasticity and lesser the demand elasticity, the more tax burden will be on consumers than producers.
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