Suppose the market demand is QD = 200 - P and market supply is QS = 4P - 100.

A. Suppose the government imposes a tax of t = 5 on producers. What is the incidence of the tax on consumers? Producers?

B. What is the deadweight loss of the tax?

Answer & Explanation:

Before the tax, the equilibrium price and quantity are:

P*=$60

Q * = 140

With $5 tax on producers, the market supply after tax is:

P=25 + (QS/4) + 5

P=30 + (QS/4)

The new equilibrium quantity would be:

30 + (QS/4) = 200-QD

as QD=QS

Q**=136

Price that producers receive : P=25 + (QS/4)

P=25 + (136/4)

Pp=$59

Price that consumers pay : P=200-QD

P=200-136

Pc=$64

A.

Consumer's tax incidence = ($64 - $60) x 136 = $544

Producer's tax incidence = ($60 - $59) x 136 = $136

B.

Deadweight loss is: 1/2 x ($64-$59) x (140 - 136) = $10