Post by: tyratatyanna on Nov 23, 2022
The graph shows the demand (D) and supply (S) for the oil market.
Assume that A=235, B=175, C=100, D=25, E=30, and F=135. What is the excess burden of a government imposed tax equal to (P4-P2)? Suppose this market suffers from a negative externality and the amount of the tax equals the marginal external cost of the externality. What is the excess burden of the tax?
◦ $130, $130
◦ $330, $330
◦ $130, $0
◦ $330, $130
Post by: fdsajkl on Nov 23, 2022
If the government levies a tax equal to P4 - P2, that shifts the supply curve (S) upward to S + tax.
Before the tax, market equilibrium occurs where supply (S) equals demand (D), at a price of P3 and a quantity of Q2.
After the tax, market equilibrium occurs where supply with the tax (Stax) equals demand (D), at a price of P4 and a quantity of Q1.
The excess burden is equal to the deadweight loss due to the tax = C + E = 100 + 30 = $130.
However, if the market suffers from a negative externality and the amount of the tax equals the marginal external cost of the externality, the tax will actually bring about an efficient level of output. With the tax, the equilibrium is economically efficient and the excess burden of the tax is $0.