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

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