The price would be $7.50 with a quantity demand of 450. Taxes reduce both consumer and producer surplus. However, what does sannin mean taxes create a new section called “tax revenue.” It is the revenue collected by governments at the new tax price.
In this case a million-dollar loss to government would be considered efficient if it resulted in a $1 gain to a consumer. To ensure that our metric for efficiency is still useful we must consider government when calculating market surplus. A per unit tax, or specific tax, is a tax that is defined as a fixed amount for each unit of a good or service sold, such as cents per kilogram. It is thus proportional to the particular quantity of a product sold, regardless of its price.
In this case, though, we know that price changes come with a change in quantity. A higher price for consumers will cause a decrease in the quantity demanded, and a lower price for producers will cause a decrease in quantity supplied. This reduction from equilibrium quantity is what causes a deadweight loss in the market since there are consumers and producers who are no longer able to buy and supply the good. Figure 4.7aWhat if the legal incidence of the tax is levied on the consumers?
If demand is relatively inelastic and supply is relatively elastic, then consumers bear more of the burden of a tax. In both instances of this hypothetical this dairy market, producers bear over 50% of the tax, meaning in box cases, supply isrelatively more elastic than demand. In Topic 4.3, we discussed some of the many factors that cause supply and demand to be relatively more or less elastic.
Identify the quantity of soft drinks that will be exchanged in the market as a result of the price ceiling. BusinessEconomicsQ&A LibraryAssume that sugar-based soft drinks are produced in a market shown on the graph above. Producers, who now receive only $2.00/gallon for their production, will also decrease quantity supplied by 1.5 million gallons of oil. It is no coincidence that the size of the decrease is the same.
Tax revenue decreases, and the deadweight loss increases. A deadweight loss is a cost to society created by market inefficiency, which occurs when supply and demand are out of equilibrium. As we speculated, consumers bear a smaller burden in the US market, and in both cases a smaller burden than the producers. This leads us to our second principle of relative elasticity. Consumers pay the entire tax, and there is no deadweight loss because the equilibrium quantity of good X remains constant.
Deadweight loss is the loss of something good economically that occurs because of the tax imposed. Consumers experience shortages, and producers earn less than they would otherwise. Tax on a product alone is not the only contributor to deadweight loss. People are less likely to desire and seek work when the tax imposed on them is more than what would be possible if they did not seek work or higher-paying work.