elasticity and government excise tax revenue

Elasticity and Government Excise Tax Revenue

Activity 21

Remember this exercise: with the elasticity of demand for the good similar to the elasticity of supply

.10

.05

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.50

.45

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D

What is the equilibrium price? $.25

What is the equilibrium quantity? 200

What is the consumer surplus at equilibrium? ((.45-.25)x200)/2 = 20

What is the producer surplus at equilibrium? ((.25-.05)x200)/2 = 20

Assuming this is a competitive market, In what way is this efficient? Consumer and Producer Surplus are equal and at their maximum MSB = MSC

Now let’s put that tax in place

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What is the new equilibrium price? $.325

What is the new equilibrium quantity? 125

What is the consumer surplus at the new equilibrium? .45-.32.5=.125

(.125x125)/2 = $9.375What is the producer surplus at the new equilibrium? .175-.05=.125(.125x125)/2 = $9.375

Assuming this is a competitive market, In what way is this efficient? It’s not!!! Although consumer and producer surplus are equal, 75 units of output are lost

S1

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Total Revenue or PxQ = $50.00 (.25 x 200) at initial equilibrium

supply

demandTotal revenue received by sellers

At equilibrium

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After Government Excise Tax of $.15, total revenue(.325 x 125)=$40.625

S1 supply+tax

supply

demand

$40.625 Total Revenue

available after tax is levied;

lost revenue to the sellers is $50- 21.875 = $28.125Less the $9.375 tax paid = $18.75

$ .25 x 75 = 18.75

uncollected

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Government Excise Tax Revenue = $18.75 (.15 x 125)

S1 supply+tax

supply

demand

Government Excise Tax Revenue = $18.75 ((.325-.175)x125) or (.15 x 125)

Consumers pay .075 in higher prices (.325-.25)

Or a total of$9.375 of the tax

Sellers pay .075 in the form of lost revenue (.25-.175)

Or a total of $9.375 of the tax

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PART A (Figure 21.3) Relatively Inelastic Demand to Supply

demand

supply

S1 supply+tax

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PART A (Figure 21.3) Relatively Inelastic Demand to Supply

demand

supply

S1 supply+tax

$52.5 Total Revenue available after tax is levied;

revenue gained is $52.0- 50 = $2.5lost revenue to the sellers is $50- 30 = $20.00Less the $7.5 tax paid = $12.5

$ .25

x 75

= 12.5

uncollected

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PART A (Figure 21.3) Relatively Inelastic Demand to Supply

demand

supply

S1 supply+tax

Government Excise Tax Revenue = $22.50 ((.35-.20)x150) or (.15 x 150)

Consumers pay .10 in higher prices (.35-.25)

Or a total of$15.00 of the tax

Sellers pay .075 in the form of lost revenue (.25-.175)

Or a total of $7.50 of the tax

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50 100 150 200 250 300

PART B (Figure 21.4) Relatively Elastic Demand to Supply

demand

S1 supply+tax

supply

.25

.30

.35

.20

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.05

.40

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50 100 150 200 250 300

PART B (Figure 21.4) Relatively Elastic Demand to Supply

demand

S1 supply+tax

supply

Government Excise Tax Revenue = $15.00 ((.30-.15)x150) or (.15 x 100)

Sellers pay .10 in the form of lost revenue (.25-.15)

Or a total of $10 of the tax

Consumers pay .05 in higher prices (.30-.25)

Or a total of$5.00 of the tax

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50 100 150 200 250 300

PART B (Figure 21.4) Relatively Elastic Demand to Supply

demand

S1 supply+tax

supply

$30. Total Revenue

available after tax is levied;

lost revenue to the sellers is

$50 - 15 = $35Less the $10 tax paid = $25

$ .25

x 100

= $25 uncollected

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PART C (Figure 21.5) Perfectly Inelastic Demand

demand

S1 supply+tax

supply

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50 100 150 200 250 300

PART C (Figure 21.5) Perfectly Inelastic Demand

demand

S1 supply+tax

supplyGovernment Excise Tax Revenue = $30 ((.40-.25)x200) or (.15 x 200)

Consumers pay .15 in higher prices (.40-.25)

Or a total of$30. of the tax

Sellers pay 0 in the form of lost revenue

Or $0 of the tax

$80 Total Revenue

available after tax is levied;

0 is uncollected

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50 100 150 200 250 300

PART D (Figure 21.6) Perfectly Elastic Demand

demand

S1 supply+tax

supply

.25

.30

.35

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.15

.10

.05

.40

.50

.45

50 100 150 200 250 300

PART D (Figure 21.6) Perfectly Elastic Demand

demand

S1 supply+tax

supply

Government Excise Tax Revenue = $7.5

((.25-.15)x50)

or (.15 x 50)

Consumers pay 0 in higher prices

Or a total of $0 of the tax

Sellers pay $7.5 in the form of lost revenue

((.25-.10)x50)

Or a total of all $7.5 of the tax

.25

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PART D (Figure 21.6) Perfectly Elastic Demand

demand

S1 supply+tax

supply

$12.5 Total Revenue

available after tax is levied;

lost revenue to the sellers

is $50 - 5 = $45Less the $5 tax paid = $37.5

$ .25

x 150

= $37.5 uncollected