Answer to Question #62825 in Economics for Diego Infanzon

Question

To meet its commitments under the Copenhagen Agreement, the U.S. has to implement an excise tax on ozone depleters such as the chemical CFC-12. Originally, the market for CFC-12 is:
Demand Qd = 18.4 – 0.5P Supply Qs = 10 + 2.5P
After a 60 cent (0.6) excise tax is imposed, the supply curve shifts to:
Post-tax Supply Qst = 8.5 + 2.5P
a) What is the equilibrium price P before the tax is imposed?
b) What is the equilibrium price P after the tax is imposed?
c) Who bears the bigger burden of the tax – buyers or sellers?
d) What is the deadweight loss of this tax?

Answer 1

Qd = 18.4 – 0.5P, Qs = 10 + 2.5P, t = $0.6, Qst = 8.5 + 2.5P
a) The equilibrium price P before the tax is imposed is:
Qd = Qs,
18.4 – 0.5P = 10 + 2.5P,
P = 8.4/3 = $2.8,
Q = 10 + 2.5*2.8 = 17 units.
b) The equilibrium price P after the tax is imposed is:
Qd = Qst,
18.4 – 0.5P = 8.5 + 2.5P,
P = 9.9/3 = $3.3,
Q = 8.5 + 2.5*3.3 = 16.75 units.
c) As the increase in price is 3.3 - 2.8 = $0.5 and the tax imposed is $0.6, then buyers bears the bigger burden of the tax or $0.5 from every unit sold.
d) The deadweight loss of this tax is DWL = 0.5*(3.3 - 2.8)*(17 - 16.75) = $0.0625.