Principles_OTHERsolution_ch8

# Principles_OTHERsolution_ch8 - Suggested Answers for Mankiw...

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1 Suggested Answers for Mankiw, Chapter 8, “Other” Problems 1. a. Figure 3 illustrates the market for pizza. The equilibrium price is P 1 , the equilibrium quantity is Q 1 , consumer surplus is area A + B + C, and producer surplus is area D + E + F. There is no deadweight loss, as all the potential gains from trade are realized; total surplus is the entire area between the demand and supply curves: A + B + C + D + E + F. Figure 3 b. With a \$1 tax on each pizza sold, the price paid by buyers, P B , is now higher than the price received by sellers, P S , where P B = P S + \$1. The quantity declines to Q 2 , consumer surplus is area A, producer surplus is area F, government revenue is area B + D, and deadweight loss is area C + E. Consumer surplus declines by B + C, producer surplus declines by D + E, government revenue increases by B + D, and deadweight loss increases by C + E. c. If the tax were removed and consumers and producers voluntarily transferred B + D to the government to make up for the lost tax revenue, then everyone would be better off than without the tax. The equilibrium quantity would be Q 1 , as in the case without the tax, and the equilibrium price would be P 1 . Consumer surplus would be A + C, because consumers get surplus of A + B + C, then voluntarily transfer B to the government. Producer surplus would be E + F, because producers get surplus of D + E + F, then voluntarily transfer D to the government. Both consumers and producers are better off than the case when the tax was imposed. If consumers and producers gave a little bit more than B + D to the government, then all three parties, including the government, would be better off. This illustrates the inefficiency of taxation.

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2 3. a. The statement, "A tax that has no deadweight loss cannot raise any
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## This note was uploaded on 04/23/2010 for the course ECONOMICS 2312 taught by Professor William during the Spring '09 term at 東京大学.

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Principles_OTHERsolution_ch8 - Suggested Answers for Mankiw...

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