e100_winter2010_lecture12_topost

e100_winter2010_lecture12_topost - Perfectly Competitive...

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Unformatted text preview: Perfectly Competitive Market Outcomes Government interventions Evaluating welfare of producers & consumers Effect of tax on firms (under perfect competition) • Suppose government imposes a tax of $t on every unit of output produced • Adds to per unit cost of production – Raises average & marginal costs • Firm will need to re-optimize $ q MC AVC AVC+t MC+t P Tax increases average, marginal costs • Firm, after tax, will set P=MC at lower level of output OR After tax, some firms will stop producing (P = MC now at < AVC, or < ATC) $ q MC AVC AVC+t MC+t P Effect of tax on industry • If all firms face tax, all will either reduce quantity produced • Industry supply will fall (supply curve shifts back) $ Q S0 P D0 S1 t Example: Tax on producers under perfect competition • Consider a tax of $1/unit that is placed on either producers • Before tax: • Qd = 100- 2P • Qs = 10 + P • P = 30, Q = 40 What if producers pay t • With tax P = (Qs – 10) + t • P = Qs-9, Qs = P +9 • Equil: P + 9= 100 -2P • 3P = 91 , P = 30 1/3 After tax • Market price goes to $30 1/3 (but must pay $1/unit to government) – Producers keep 29.33 per unit • Qd = 100-2(30.33) = 39.34 • Producers pay .67 of $1 tax (higher P offsets some of tax): Producers ― tax burden‖ • If consumers pay • Qd = 100-2(P+t) or P = (50-t)-(1/2Q) • 100-2P-2t = 10 + P • 3P = 90-2t = 88 • P = 88/3=29 1/3 • Consumers pay P + t = 30 1/3 • Producers get P = 29 1/3 • Govt gets 1 (*Q) Tax Burden is same—regardless of who legally pays tax • Before tax: P = 30 • After tax, producers gets 30.33-1 =29.33 if • After tax, producers gets 30....
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This note was uploaded on 02/27/2010 for the course ECN 40279 taught by Professor Annstevens during the Spring '10 term at UC Davis.

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e100_winter2010_lecture12_topost - Perfectly Competitive...

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