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# equilibrium2-ho - Equilibrium Chapter 16 Competitive...

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Equilibrium Chapter 16

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Competitive Equilibrium: Motivating Questions Firms are ‘price-takers’ in competitive markets, but how is the market price (and quantity) determined? competitive equilibrium What happens to equilibrium price and quantity when either supply or demand changes? comparative statics What are the eﬀects of taxes and subsidies on prices and quantities? What are the welfare eﬀects of taxes and subsidies? deadweight loss, tax incidence
Taxes Quantity (or excise) tax Eﬀect on p , q Subsidy Incidence Welfare eﬀects Price tax: eﬀect on p , q

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Quantity Taxes Levied on each unit sold. E.g. gasoline tax: seller sets price at \$2.05/gallon and gasoline tax is \$0.35/gallon. Consumer must pay p d = 2 . 05 + 0 . 35 = 2 . 40 dollars/gallon Seller gets p s = 2 . 05 Like any tax, this creates a wedge between what consumer pays and what producer receives The \$0.35 tax, collected by the govt., is the diﬀerence between the consumer price , p d , and the producer price , p s : p d - p s = 0 . 35
Equilibrium with a Quantity Tax Suppose gasoline tax is t dollars/gallon. t as a wedge: p d - p s = t = p d = p s + t How does this aﬀect equilibrium? New condition: D ( p d ) = S ( p s ) Rewrite as D ( p s + t ) = S ( p s ) or D ( p d ) = S ( p d - t ) Can think of this as either shifting D or S

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Equilibrium with a Quantity Tax One view: demand shifts downward Equilibrium with Quantity Tax: Shifting Demand Gas p s D(p s + t) p s S(p s ) q t D(p s ) p * q * t p d
Equilibrium with a Quantity Tax

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## This note was uploaded on 03/17/2010 for the course ECON 100B taught by Professor Kilenthong during the Spring '08 term at UCSB.

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equilibrium2-ho - Equilibrium Chapter 16 Competitive...

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