P53-2 Study Tip 1: You could calculate a side's share of the tax incidence in the above example by taking LLNew Price-Old PricellTaxl. So if the market equilibrium was $50 and the $4 tax increased the consumer's price to $53, then the consumer paid E53-50V4I = t4 or 75% of the tax, which implies that producers must have made $49 per unit, so their share is |(49-50)/4|=1/4 or 25%. The study tip is that you could change the slope (and therefore the elasticity) of one of the sides of the market and observe how each side's change. As you make one side of the market more inelastic, then that side will take on a larger share of the tax. It will also cause deadweight loss to decrease because market production will not change as much. The reverse is true if you make one side more elastic, then their share of the tax burden will decrease, and deadweight loss will increase. Calculating this point is not important for the test, but understanding and predicting the effects is, so it might be worth experimenting for you to get a handle on it. Study Tip 2: A subsidy is just a negative tax. If you wanted to study a $4 per unit subsidy, then you would just repeat all of the above steps but use -4 instead of +4 in making your initial adjustments. Instead of government tax revenue, you would have government expenditures as the $4 times the market production. The deadweight loss would be the change in social net benefits, or the amount of government expenditures minus the change in consumer and producer surplus. Study Tip 3: Be able to hand draw a market distorted by a tax or subsidy, then label it. You'd want to be able to identify the various areas to be calculated for welfare statistics. Assume a case where the market demand curve be represented by Q=400-5P, and market supply be Q=3 P. Calculate a couple of welfare statistics, Let's impose a price floor of $75 in this market. To help yourself out, why don't you make a diagram like that at the beginning of this problem set. but with the price floor imposed on it. Label or find the critical points you think you need, then go forward to answer the problem. Be careful with the producer surplus calculation, because the setting probably violates the assumptions you built it on, so look at the graph you made and make a strategy for each one. If you want to help check your work, the market clearing under this supply and demand functions will yield P*=50 and Q*=150. which results in $9,750 of total benefits, $2,250 of consumer surplus, $3,750 of total costs, and $3,750 of producer surplus (total cost equals producer surplus by coincidence, FYI) 1. Calculate the New Consumer Surplus under the price floor. 2. Calculate the New Producer Surplus under the price floor. 3. Calculate the Deadweight Loss under the price floor