1. Elasticity and Government Excise Tax Revenue Activity 21

2. 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

3. 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

4. .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

5. .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

6. .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

7. .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

8. .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

9. .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

10. .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

11. .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

12. .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

13. .25.30.35.20.15.10.05.40.50.45 50100150200250300 PART C (Figure 21.5) Perfectly Inelastic Demand demand S1 supply+tax supply

14. .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

15. .25.30.35.20.15.10.05.40.50.45 50100150200250300 PART D (Figure 21.6) Perfectly Elastic Demand demand S1 supply+tax supply

16. .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

17. .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