 # Elasticity and Government Excise Tax Revenue Activity 21.

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Elasticity and Government Excise Tax Revenue Activity 21

Remember this exercise: with the elasticity of demand for the good similar to the elasticity of supply.10.05.20.15.50.45.40.35.30.25 10015020025030050 S D What is the equilibrium price? \$.25 What is the equilibrium quantity? 200 What is the consumer surplus at equilibrium? ((.45-.25)x200)/2 = 20 What is the producer surplus at equilibrium? ((.25-.05)x200)/2 = 20 Assuming this is a competitive market, In what way is this efficient? Consumer and Producer Surplus are equal and at their maximum MSB = MSC

Now let’s put that tax in place.10.05.20.15.50.45.40.35.30.25 10015020025030050 S D What is the new equilibrium price? \$.325 What is the new equilibrium quantity? 125 What is the consumer surplus at the new equilibrium?.45-.32.5=.125 (.125x125)/2 = \$9.375 What is the producer surplus at the new equilibrium?.175-.05=.125 (.125x125)/2 = \$9.375 Assuming this is a competitive market, In what way is this efficient? It’s not!!! Although consumer and producer surplus are equal, 75 units of output are lost S1

.25.30.35.20.15.10.05.40.50.45 50100150200250300 Total Revenue or PxQ = \$50.00 (.25 x 200) at initial equilibrium supply demand Total revenue received by sellers At equilibrium

.25.30.35.20.15.10.05.40.50.45 50100150200250300 After Government Excise Tax of \$.15, total revenue(.325 x 125)=\$40.625 S1 supply+tax supply demand \$40.625 Total Revenue available after tax is levied; lost revenue to the sellers is \$50- 21.875 = \$28.125 Less the \$9.375 tax paid = \$18.75 \$.25 x 75 = 18.75 uncollected

.25.30.35.20.15.10.05.40.50.45 50100150200250300 Government Excise Tax Revenue = \$18.75 (.15 x 125) S1 supply+tax supply demand Government Excise Tax Revenue = \$18.75 ((.325-.175)x125) or (.15 x 125) Consumers pay.075 in higher prices (.325-.25) Or a total of\$9.375 of the tax Sellers pay.075 in the form of lost revenue (.25-.175) Or a total of \$9.375 of the tax

.25.30.35.20.15.10.05.40.50.45 50100150200250300 PART A (Figure 21.3) Relatively Inelastic Demand to Supply demand supply S1 supply+tax

.25.30.35.20.15.10.05.40.50.45 50100150200250300 PART A (Figure 21.3) Relatively Inelastic Demand to Supply demand supply S1 supply+tax \$52.5 Total Revenue available after tax is levied; revenue gained is \$52.0- 50 = \$2.5 lost revenue to the sellers is \$50- 30 = \$20.00 Less the \$7.5 tax paid = \$12.5 \$.25 x 75 = 12.5 uncollected

.25.30.35.20.15.10.05.40.50.45 50100150200250300 PART A (Figure 21.3) Relatively Inelastic Demand to Supply demand supply S1 supply+tax Government Excise Tax Revenue = \$22.50 ((.35-.20)x150) or (.15 x 150) Consumers pay.10 in higher prices (.35-.25) Or a total of\$15.00 of the tax Sellers pay.075 in the form of lost revenue (.25-.175) Or a total of \$7.50 of the tax

.25.30.35.20.15.10.05.40.50.45 50100150200250300 PART B (Figure 21.4) Relatively Elastic Demand to Supply demand S1 supply+tax supply

.25.30.35.20.15.10.05.40.50.45 50100150200250300 PART B (Figure 21.4) Relatively Elastic Demand to Supply demand S1 supply+tax supply Government Excise Tax Revenue = \$15.00 ((.30-.15)x150) or (.15 x 100) Sellers pay.10 in the form of lost revenue (.25-.15) Or a total of \$10 of the tax Consumers pay.05 in higher prices (.30-.25) Or a total of\$5.00 of the tax

.25.30.35.20.15.10.05.40.50.45 50100150200250300 PART B (Figure 21.4) Relatively Elastic Demand to Supply demand S1 supply+tax supply \$30. Total Revenue available after tax is levied; lost revenue to the sellers is \$50 - 15 = \$35 Less the \$10 tax paid = \$25 \$.25 x 100 = \$25 uncollected

.25.30.35.20.15.10.05.40.50.45 50100150200250300 PART C (Figure 21.5) Perfectly Inelastic Demand demand S1 supply+tax supply

.25.30.35.20.15.10.05.40.50.45 50100150200250300 PART C (Figure 21.5) Perfectly Inelastic Demand demand S1 supply+tax supply Government Excise Tax Revenue = \$30 ((.40-.25)x200) or (.15 x 200) Consumers pay.15 in higher prices (.40-.25) Or a total of\$30. of the tax Sellers pay 0 in the form of lost revenue Or \$0 of the tax \$80 Total Revenue available after tax is levied; 0 is uncollected

.25.30.35.20.15.10.05.40.50.45 50100150200250300 PART D (Figure 21.6) Perfectly Elastic Demand demand S1 supply+tax supply

.25.30.35.20.15.10.05.40.50.45 50100150200250300 PART D (Figure 21.6) Perfectly Elastic Demand demand S1 supply+tax supply Government Excise Tax Revenue = \$7.5 ((.25-.15)x50) or (.15 x 50) Consumers pay 0 in higher prices Or a total of \$0 of the tax Sellers pay \$7.5 in the form of lost revenue ((.25-.10)x50) Or a total of all \$7.5 of the tax

.25.30.35.20.15.10.05.40.50.45 50100150200250300 PART D (Figure 21.6) Perfectly Elastic Demand demand S1 supply+tax supply \$12.5 Total Revenue available after tax is levied; lost revenue to the sellers is \$50 - 5 = \$45 Less the \$5 tax paid = \$37.5 \$.25 x 150 = \$37.5 uncollected