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 sameregardless 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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e100_winter2010_lecture12_topost - Perfectly Competitive...

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