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The deadweight loss

There are two Markets.

Both Market A (Athletes) and Market B (Boats) have the same demand curve of Qd = 400 - 20 Pd where Pd is the price consumers pay and Qd is the quantity demanded.

Market A has a supply curve of Qsa = 100 + 10Psa where Ps is the price received by suppliers and Qs is the quantity supplied.

Market B has a supply curve of Qsb = -200 + 40Psb where Ps is the price received by suppliers and Qs is the quantity supplied.

Both markets have an equilibrium price of 10 and quantity of 200. Therefore both markets are of the same size.

Question: If you palce the same tax on both markets, do you expect more government revenue in Market A, Market B, or the same amount and why?
Is this correct: You will have the same amount of government revenue since the equilibrium and quantity and demand curve is the same for both markets.

Questioin: If you palce the same tax on both markets, do you expect more Dead Weight Loss in Market A, Market B, or the same amount and why?
I have no idea on this question.

Question: Based on efficiency, wheich market should we tax and why?
Is this correct: Market B because it is more inelastic.

Question: Based on equity, which market should we tas and why?
Is this correct: Market B because it is more inelastic.

Solution Preview

Hello!
The more elastic supply or demand is in a market, the higher impact a tax will have on quantity. That is, in markets where supply or demand is more elastic, we should expect the equilibrium quantity to fall by a greater amount after applying a tax.

In your case, we have two markets where the demand is exactly the same, so the elasticity of demand is the same in both markets. What about elasticity of supply?

Recall that the formula for elasticity is (dQ/dP)*(P/Q). Let's calculate it for the supply in market A, using the current equilibrium (pre-tax) price and quantity in the calculation. We have that:

(dQ/dP) = 10 (because the function is Q = 100 + 10P)
P = 10
Q = 200 (equilibrium prices and quantity)

Therefore, elasticity of supply for market A is 10*10/200 = ...

Solution Summary

Policy Implications are explored.

$2.19