Ch09Figures - Ch 09 How Government Overrides Markets 4...

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Unformatted text preview: Ch 09 How Government Overrides Markets 4 Figure 9.1 A $2 Tax on Movie Tickets The market for movie tickets in a certain city is in equilibrium. At a price of $14, 2 million movie tickets are sold. A $2 tax on movie tickets shifts the supply curve up by $2. After the tax, the equilibrium price buyers pay is $15.50. The city government gets $2 in tax revenue for each ticket sold and the theater owner gets $13.50. The tax reduces the equilibrium quantity of tickets sold from 2 to 1.2 million. tax of $2 per movie ticket shifts the supply curve up by $2 buyers pay $15.50 per ticket sellers get $13.50 per ticket economic efficiency is reduced --- deals to buy and sell tickets are eliminated because of the tax Quantity of Movie Tickets (millions of tickets) 16.50 .4 .8 1.2 1.6 2.0 2.4 2.8 13.00 14.00 15.00 S 16.00 D Price ($) E 15.50 14.50 13.50 E S 17.00 Ch 09 How Government Overrides Markets 6 Figure 9.2 Elasticities Determine Who Pays the Tax In Part (a) the demand for movie tickets is more price inelastic than the supply, while in Part (b) the supply of movie tickets is more price inelastic than the demand. When demand is more price inelastic, buyers pay $15.75 - $14 = $1.75 of the tax. Sellers pay $14 - $13.75 = $0.25 of the tax. As demand becomes more price inelastic, buyers pay more of the tax. When supply is more price inelastic, buyers pay $14.75 - $14 = $0.75 of the tax. Sellers pay $14 - $12.75 = $1.25 of the tax. As supply becomes more price inelastic, sellers pay more of the tax. 16.50 Quantity of Movie Tickets (millions of tickets) .4 .8 1.2 1.6 2.0 2.4 2.8 13.00 14.00 15.00 S 16.00 D Price ($) E 14.50 13.50 E S 17.00 15.50 buyers pay $1.75 of the tax sellers pay $0.25 of the tax Quantity of Movie Tickets (millions of tickets) 16.50 .4 .8 1.2 1.6 2.0 2.4 2.8 13.00 14.00 15.00 S 16.00 D Price ($) 15.50 14.50 13.50 S 17.00 E E 13.75 15.75 12.75 14.75 buyers pay $0.75 of the tax sellers pay $1.25 of the tax (a) demand more price inelastic (b) supply more price inelastic Ch 09 How Government Overrides Markets 8 Figure 9.3 The Deadweight Loss of a Tax The results of the tax are shown in three parts. Part (a) shows the loss in consumer surplus due to the higher price and smaller number of ticket purchases along with the loss of producer surplus because sellers get a lower price for a ticket and sell fewer tickets. Part (b) shows the gain in government tax revenue from ticket sales. Part (c) shows the net effect of the tax. The losses outweigh the gains by the striped area --- the deadweight loss of the tax. The deadweight loss is the cost of reduced economic efficiency with a tax. It is the difference between the marginal benefit and marginal cost of deals that dont happen because of the tax....
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Ch09Figures - Ch 09 How Government Overrides Markets 4...

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