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If the government decides to impose a tax of 20 cents per liter on petrol, illustrate...

  1. If the government decides to impose a tax of 20 cents per liter on petrol, illustrate the impact of the tax on market equilibrium price, and discuss whether the outcome is efficient by demonstrating the change of consumer’s and producer’s surplus as a result of tax .

- Draw a demand and supply model with demand curve

- Show the shift of S as a result of 20 cent tax.

- Mark the price paid by consumer and received by the seller.

- demonstrate change of consumer and producer’s surplus, tax revenue, and deadweight loss.

PLEASE DRAW A GRAPH USING MICROSOFT TOOL/COMPUTER

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Answer #1

Initial equilibrium occurs when price is 50 cents and quantity tradedis 10 units. If a tax of 20 cents is imposed, it will raise price consumer pay to 60 cents and price producer receive to 40 cents.

Initial consumer surplus was area of portion A + B + D + E

Initial producer surplus was area of portion C + F + G + H

New consumer surplus is area of portion A

New producer surplus is area of portion H

Government revenue is area of portion B + D + C + F

Deadweight loss is area of portion E + G

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