QUESTION 33

1. a[6] Explain why the largest burdens of a particular tax may fall on agents who do not pay the tax. Give an example of a tax with this property. Explain how you can tell that it has this property. b.[5] The US retail market for acetominophen (in Tylenol and generic versions of it) is competitive, with an average price of about $4 per 100 grams of the drug. In the link labeled Graphs for FINAL EXAM, which graph of supply and demand curves, A, B, C, or D, probably best represents this market during a recent 3 year period? Why is the graph you picked better than the others? c.[5] Suppose now that a $1 per unit excise tax is charged to sellers in this market. In the graph you picked in part b, which side of the market, buyers or sellers, would bear the bigger share of the tax burden? Explain why. d.[8] Assume that the marginal damage from acetaminophen is 0. Estimate the deadweight loss (DWL) ratio (the ratio DWL tax revenue) for the tax in part c, using the graph you picked in part b. Explain all your steps in getting your estimate. Is it socially efficient to tax this good? What other factors might be important to consider before deciding whether to tax it?