Tutorial 6: Taxes and Subsidies This tutorial follows on from Tutorial 2 on Price Controls. YoYo production causes the release of toxic waste products into the atmosphere. The Congressional Yo-Yos removed the price oor, so output in the industry rose again. In response, they decide to impose a per yo-yo tax on all units sold in the industry. They want to set the tax so that output falls to its price floor level (Q = 80). What tax should be charged per yo-yo? (Hint: this one is easy if you see what is going on, already did the rst tutorial, and understand our in-class tax analysis.) Explain. Should Congress tax producers or consumers in this case? Why? Explain. At that tax rate, what fraction of the tax is passed through to yo-yo buyers as a rise in price? What fraction is passed through to yo-yo producers as a fall in price? Calculate and explain. You should be able to illustrate what's going on by referring to your graph of the equilibriums before and after the tax. Calculate the elasticities of demand and supply at the original equilibrium before the tax is imposed. Use those and the formulas for the pass-thru fractions in the Lecture Notes to calculate the pass-thru fractions again. Verify that you get the same answer as you got in part c. Calculate CS, PS, and DWL with the tax. Also calculate any transfers or government revenue. How do your answers compare to what you answered in the tutorial on price controls? Now suppose that due to intensive Yo-Yo lobbying, Congress reverses and implements a subsidy of $3 per yo-yo. Draw the equilibrium in the industry with the subsidy. Using the elasticities you calculated above, calculate the pass-thru fractions of the subsidy for both consumers and producers. Does your answer make sense? Explain. What is CS with the subsidy? What is PS? (Hint: their triangles overlap when there is a subsidy. Don't be surprised when you see that graphically. The overlap is the amount of government spending.) What is the amount of government spending? What is the DWL in this case? Show it graphically, and calculate it. Why is there DWL with a subsidy? Explain using your own words and economic intuition