Ch10 - Chapter 10 Competitive Markets: Application Total...

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Chapter 10 Competitive Markets: Application
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Total Surplus in Competitive Market Equilibrium
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Competitive Market with Tax Suppose that the government imposes a tax of $6 per unit to seller. The impact of the tax is “as if ” every seller’s marginal cost has increased by $6 per unit. The “as if” supply curve S + $6 tells us how much producers will offer for sale when the price charged to consumers covers the cost plus the $6 tax (next slide). If price including tax is $10, producers offer 2 million units for sale (point E on the S + $6 supply curve). When consumers pay a market price of $10 per unit, producers receive only $4 after the tax is deducted (point F on the actual supply curve). The equilibrium with the tax is determined at the intersection of the demand curve and the “as if” supply curve (point M ). The market-clearing quantity is 4 million units Consumers pay $12 and producers receive $6 (point N ).
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Competitive Market with Tax
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Competitive Market with Tax Without tax: Consumer Surplus is A + B + C + E ($36 million) Producer Surplus is F + G + H ($18 million) Government Receipts from tax is zero Net benefit is A + B + C + E + F + G + H ($54 million) Deadweight loss is zero With tax: Consumer Surplus is A ($16 million) Producer Surplus is H ($8 million) Government Receipts from tax is B + C + G ($24 million) Net benefit is A + B + C + G + H ($48 million) Deadweight loss is E + F ($6 million) Impact of tax: Decrease in consumer surplus is B + C + E ($20 million) Decrease in producer surplus is F + G ($10 million) Decrease in net benefit is E + F ($6 million)
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Competitive Market with Tax
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Competitive Market with Tax The impact of tax: The market will under -produce relative to efficient level. Consumer surplus will be lower than with no tax. Producer surplus will be lower than with no tax. The impact on the government budget will be positive because tax receipts are collected. The tax receipts will be less than the decrease in consumer and producer surplus. Thus, the tax will cause a reduction in net benefits ( deadweight loss ).
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Competitive Market with Tax Tax will increase the market price that consumers pay, and will increase the after-tax price that sellers receive. Which price will change more? The incidence (or burden) of a tax: A measure of the effect of a tax on the prices consumers pay and sellers receive in a market. The incidence depends on the price elasticity of supply and demand curves (next slide). Case 1: Demand is relatively inelastic. Consumers pay$8 more and producers receives $2 less. Price change is larger for consumers. Case 2: Supply is relatively inelastic. Consumers pay $2 more and
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This note was uploaded on 02/29/2012 for the course 320 322 taught by Professor Macro-williams,micro-yoshi during the Fall '10 term at Rutgers.

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Ch10 - Chapter 10 Competitive Markets: Application Total...

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