AEM451_PS_1_Solutions - Environmental Economics AEM...

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Environmental Economics AEM 451/ECON 409 Solutions to Assignment #1 1. a&b. Q P MWTP MC1 MC2 Q1 Q2 P2 P1 Per-unit tax Original Situation (MC 1 , with equilibrium price and quantity equal to p 1 and q 1 ): Consumer Surplus: a+b+c+d (The area between the MWTP and P 1 ) Producer Surplus: e+f+g (The area between P 1 and the MC 1 curve) There is no government revenue before the tax, so total surplus is CS+PS= a+b+c+d+e+f+g After the tax (MC 2 , with equilibrium price and quantity equal to p 2 and q 2 ): Consumer Surplus: a Producer Surplus: b+e Government Revenue: c+f
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(The area between MC 2 and MC 1 , up to q 2 ) (Alternately, you can draw the government revenue as a box from 0 to q 2 on the Q axis, and P 2 to where q 2 intersects MC 1 on the P axis, but that makes the calculations a little harder for this problem. See Figure 2) The deadweight loss is the loss in total surplus from the tax. Original Situation
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AEM451_PS_1_Solutions - Environmental Economics AEM...

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