Question

The demand for skateboards in Vermillion is Q = 500−2P and the supply curve is Q = 1/2 P. The government 2

decides to raise revenue by taxing consumers $25 for each skateboard purchased.

(a) Graph the supply and demand curves and calculate the consumer and producer surplus that would exist if there were no tax in the market.

(b) Show how the tax will change the market equilibrium price and quantity. Identify the price paid by consumers and the price received by producers, and use these to indicate the burden borne by each party due to the tax (total tax incidence for consumers/producers). Calculate the change in consumer and producer surplus from the tax.

(c) Using your diagram from part (a), calculate the deadweight loss from the tax. Intuitively, why is there deadweight loss from a tax and what does it represent?

Answer 1