Suppose that a market is described by the following supply and demand equations

# Suppose that a market is described by the following

This preview shows page 8 - 9 out of 9 pages. As the figure above shows, the area of the triangle (laid on its side) that represents the deadweight loss is 1/2 × base × height, where the base is the change in the price, which is the size of the tax (T) and the height is the amount of the decline in quantity (2T/3). So the deadweight loss equals 1/2 × T × 2T/3 = T 2 /3. This rises exponentially from 0 (when T = 0) to 30,000 when T = 300, as shown in the figure below. e. The government now levies a tax on this good of \$200 per unit. Is this a good policy? Why or why not? Can you propose a better policy? A tax of \$200 per unit is a bad idea, because it is in a region in which tax revenue is declining. The government could reduce the tax to \$150 per unit, get more tax revenue (\$15,000 when the tax is \$150 versus \$13,333 when the tax is \$200), and reduce the deadweight loss (7,500 when the tax is \$150 compared to 13,333 when the tax is \$200). #### You've reached the end of your free preview.

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• Fall '14
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