Question

The government of Manitoba has decided to legalize marijuana. Legally grown marijuana will be regulated and sold in the form of cigarettes at MLCC stores across the province in handcrafted cedar boxes just like expensive cigars. The government will apply a tax to each box of marijuana cigarettes. Below is the demand and supply schedules for marijuana prior to the application of the tax (in thousands of boxes).

Quantity Demanded Boxes	Price per Box	Before Tax Quantity Supplied Boxes	After Tax Quantity Supplied Boxes
550	$90	1000
600	$85	900
650	$80	800
700	$75	700
750	$70	600
800	$65	500
850	$60	400	0
900	$55	300	0
1000	$50	200	0

1. What is the equilibrium price and quantity before the tax is imposed?

2. Suppose the Manitoba government imposes a tax of $15 per box, what is the after tax supply schedule? FILL IN THE TABLE

3. What is the equilibrium price of marijuana boxes after the tax is imposed?

Answer 1

The equilibrium price is $75 per unit and equilibrium quantity is 700 units before the tax is imposed. This is because at this price the quantity demanded is equal to quantity supplied.

Now that the Manitoba government imposes a tax of $15 per box, the supply schedule is reduced by 300 units at each price as the supply curve shifts to the left by $15 per unit.

The equilibrium price of marijuana is $85 per box and the quantity is 600 boxes after the tax is imposed.

Quantity Demanded Boxes	Price per Box	Before Tax Quantity Supplied Boxes	After Tax Quantity Supplied Boxes
550	$90	1000	700
600	$85	900	600
650	$80	800	500
700	$75	700	400
750	$70	600	300
800	$65	500	200
850	$60	400	0
900	$55	300	0
1000	$50	200	0