Ceasar

Exercise 6 (chapter 6)

1.

It does not matter the tax is imposed on the consumers or producers. Tax imposed on consumer or producers are equivalent.

In Fig. 9, tax was imposed on the consumers. As a result, the consumers have to pay the cost of the tax and the price of each gallon of gasoline they want to consume. Now, consumers have a purchasing power of $0.50 lesser, ceteris paribus. The demand of gasoline falls and the demand curve shifts to the left from D1 to D2 by $0.50. The supply curve is not affected since the cost of production remains the same for the producers.

The new equilibrium quantity falls from Q1 to Q2 and the price falls from P1 to P2. The price of the sellers received is P2 and the effective price that the buyer had to pay is P2+0.50. In this case, the tax levied on the seller is (P1-P2) and the tax levied on the seller is (P2+0.5)-P1.

In Fig. 10, the tax was imposed on the producers. As a result, cost of production for gasoline increase, thus reducing the quantity supplied at every price. To induce sellers to supply any given quantity, the market price must by $0.50 higher to compensate for the effect of tax. Thus, the supply curve shifts to the left from S1 to S2 by $0.50. The demand curve is not affected.

The new equilibrium quantity falls from Q1 to Q2 and the price rises from P1 to P2. The price of the seller received is P2. In this case, the tax levied on the consumers is P2-P1 as the market price of the gasoline rises from P1 to P2. The tax levied on the producers is 0.5-(P2-P1)= (P1-P2)-0.5) .

2.

When the demand of gasoline is more elastic, consumers are more responsive to the price changes. From Fig.11, it shows that the at the new equilibrium quantity which tax is imposed, the price pay by the consumers (P1-P0) does not rise much but the price receive by the producers (P0-P3) falls substantially. This shows that the producers bear most of the tax burden imposed by the...