7/29/2019 Lecture Presentation Excise Tax

1/15

Excise Tax

And Allocative Efficiency

7/29/2019 Lecture Presentation Excise Tax

2/15

Effect of a $.15 Excise Tax

.10

.05

.20

.15

.50

.45

.40

.35

.30

.25

Quantity SupplyPrice

BeforeTax

SupplyPrice

After Tax

50 $.10

100 .15

150 .20

200 .25

250 .30

300 .35

100 150 200 250 30050

S

7/29/2019 Lecture Presentation Excise Tax

3/15

Effect of a $.15 Excise Tax

.10

.05

.20

.15

.50

.45

.40

.35

.30

.25

Quantity Supply Price

Before Tax

Supply

Price

After Tax

50 $.10 .25

100 .15 .30

150 .20 .35

200 .25 .40

250 .30 .45

300 .35 .50

100 150 200 250 30050

S

S1

7/29/2019 Lecture Presentation Excise Tax

4/15

Suppose the elasticity of demand for thegood is similar to the elasticity of supply

.10

.05

.20

.15

.50

.45

.40

.35

.30

.25

100 150 200 250 30050

S

D

What is the equilibriumprice?

What is the equilibriumquantity?

What is the consumer

surplus at equilibrium?

What is the producersurplus at equilibrium?

Assuming this is acompetitive market, Inwhat way is thisefficient?

7/29/2019 Lecture Presentation Excise Tax

5/15

Now lets put that tax in place

.10

.05

.20

.15

.50

.45

.40

.35

.30

.25

100 150 200 250 30050

S

D

What is the newequilibrium price?

What is the newequilibrium quantity?

What is the consumer

surplus at the newequilibrium?

What is the producersurplus at the newequilibrium?

Assuming this is acompetitive market, Inwhat way is thisefficient?

S1

7/29/2019 Lecture Presentation Excise Tax

6/15

Deadweight loss to society

.10

.05

.20

.15

.50

.45

.40

.35

.30

.25

100 150 200 250 30050

S

D

What is the newequilibrium price?

What is the newequilibrium quantity?

What is the new

equilibrium price paid byconsumers?

What is the newequilibrium price paid toproducers?

What is the revenuegenerated for thegovernment?

S1

7/29/2019 Lecture Presentation Excise Tax

7/15

Part B

.10

.05

.20

.15

.50

.45

.40

.35

.30

.25

100 150 200 250 30050

S

Who bears theburden of the taxwhen demand ismore elastic than

supply? (supply ismore inelastic

than demand?)

D

7/29/2019 Lecture Presentation Excise Tax

8/15

Part B

.10

.05

.20

.15

.50

.45

.40

.35

.30

.25

100 150 200 250 30050

S

Who bears theburden of the taxwhen demand ismore elastic than

supply? (supply ismore inelastic

than demand?)

S1

D

7/29/2019 Lecture Presentation Excise Tax

9/15

Part C

.10

.05

.20

.15

.50

.45

.40

.35

.30

.25

100 150 200 250 30050

DWho bears theburden of the taxwhen demand isperfectly

inelastic?

What about a pricefloor or ceiling?

S

7/29/2019 Lecture Presentation Excise Tax

10/15

Part C

.10

.05

.20

.15

.50

.45

.40

.35

.30

.25

100 150 200 250 30050

DWho bears theburden of the taxwhen demand isperfectly

inelastic?

What about a pricefloor or ceiling?

S

S1

7/29/2019 Lecture Presentation Excise Tax

11/15

Part D

.10

.05

.20

.15

.50

.45

.40

.35

.30

.25

100 150 200 250 30050

D

Who bears theburden of the taxwhen demand isperfectly elastic?

What about a pricefloor or ceiling?

S

7/29/2019 Lecture Presentation Excise Tax

12/15

Part D

.10

.05

.20

.15

.50

.45

.40

.35

.30

.25

100 150 200 250 30050

D

Who bears theburden of the taxwhen demand isperfectly elastic?

What about a pricefloor or ceiling?

S

S1

7/29/2019 Lecture Presentation Excise Tax

13/15

Effect of a $.15 Excise Tax

.10

.05

.20

.15

.50

.45

.40

.35

.30

.25

100 150 200 250 30050

SWho bears theburden of the taxwhen supply isperfectly

inelastic?

What about a pricefloor or ceiling?D

7/29/2019 Lecture Presentation Excise Tax

14/15

Effect of a $.15 Excise Tax

.10

.05

.20

.15

.50

.45

.40

.35

.30

.25

100 150 200 250 30050

SWho bears theburden of the taxwhen supply isperfectly

inelastic?

What about a pricefloor or ceiling?D

S1

P

7/29/2019 Lecture Presentation Excise Tax

15/15

Effect of a price ceiling or floor?

.10

.05

.20

.15

.50

.45

.40

.35

.30

.25

100 150 200 250 30050

SWho bears theburden of the taxwhen supply isperfectly

inelastic?

What about a pricefloor or ceiling?D

P