Bea111 Principles Of Economics 1 Assessment Answers

Question 1

Consider a per-unit tax equal to that is collected from firms. Use supply and demand diagram(s) to demonstrate whether the

following statement is true or false and provide an explanation.

“The more elastic is demand the larger is the deadweight loss of the tax”

Question 2

Suppose that the Tasmanian government is considering imposing a per unit tax food products that have high sugar content. The tax is

to be collected from consumers. The objective is to reduce the consumption of sugar to improve health outcomes. You have been

hired by the Tasmanian government to evaluate the proposed tax. Use a supply and demand model to demonstrate whether the

following statement is true or false and provide an explanation.

“The total decrease in the consumption of sugar caused by the per-unit tax collected from consumers is larger the more elastic is

demand.”

Question 3

Consider a per-unit tax equal to  that is collected from firms. Use supply and demand diagram(s) to demonstrate whether the

following statement is true or false and provide an explanation.

“The more elastic is supply relative to demand the larger is the total tax bill paid by consumers”

Question 4

Consider a per-unit tax equal to  that is collected from consumers. Use supply and demand diagram(s) to demonstrate whether the

following statement is true or false and provide an explanation.

“The more elastic is demand relative to supply the larger is the total tax bill paid by consumers”

Answer:

Answer 1:

Per unit tax is a fixed amount of tax, imposed on a seller, for each unit of product it sells. Hence, it is proportional to the certain amount of product sold, without considering price. Hence, total price of a unit of output increases and this shifts the supply curve upward (Borck and Brueckner 2018).

Figure 1: deadweight loss after imposition of per-unit tax

Source: (created by author)

The above figure has represented impact of per-unit tax impose on both elastic and inelastic demand curve. After imposition of tax, supply curve for both cases has shifted from to S to (S+t) unit and this in turn has led the price of product to increase by P0P1 unit. However, it can be stated from the above figure that amount of deadweight loss is higher for elastic demand curve while for inelastic demand curve, this amount is low. Hence, the statement is true.

Deadweight loss implies the fall in total surplus due to market distortion like tax. For elastic demand curve, people decrease their quantity demanded by large amount when price increase in comparatively small amount and the market experience more losses.

Answer 2:

The Tasmanian government has collected per unit tax on food products from the consumers for reducing consumption of sugar. Hence, this tax has forced the price of those foods to increase further by shifting the demand curve in a downward direction and consequently total consumption can decrease further (Ihori 2017). However, this amount of reduction can be different for elastic and inelastic demand curve and this can be represented by the following figure.

Figure 2: Impact on consumer demand after imposition of per-unit tax

Source: (created by author)

According to the above figure, the amount of total decrease in the sugar consumption due to per-unit tax collected from the consumers is higher when the demand curve is elastic, which is, from Q0 to Q1, while for inelastic demand curve, this amount is Q0 to Q2. Based on figure 2, Q0Q1> Q0Q2. Hence, the statement is true.

Answer 3:

The per-unit tax t has collected from firms. However, the outcome of tax impose can be different for elastic and inelastic supply curves. The following figure has illustrated these two situations.

Figure 3: Impact of imposition a per-unit tax on elastic and inelastic supply curve

Source: (created by author)

Based on figure 3, price of a product increased from P0 to P1 unit when t amount of tax is imposed. Inelastic supply curve forces sellers to bear huge tax burden that is the shaded area in the above diagram and consequently represents that consumers bear less burden (Borck and Brueckner 2018). On the other side, elastic supply curve shifts this burden to the consumer and in this situation, consumer bears the maximum tax compare to sellers and the tax burden on seller reduces. Hence, the statement is true.

Answer 4:

The government imposes per unit tax by amount t to collect from consumers. However, more elastic demand curve compares to elastic supply curve can provide different outcomes while the demand curve becomes less elastic demand compare the supply curve (Ihori 2017).

Figure 4: More elastic and less elastic demand curve compare to the elastic supply curve

Source: (created by author)

Figure 4 has represented two demand curves where one curve is more elastic than the supply curve while the other is less elastic. According this figure, tax burden on consumer is higher when demand curve is inelastic. Hence, the given statement is wrong and for more elastic demand curve, sellers pay more bill than consumers do.

References:

Borck, R. and Brueckner, J.K., 2018. Optimal energy taxation in cities. Journal of the Association of Environmental and Resource Economists, 5(2), pp.481-516.

Ihori, T., 2017. The Theory of Taxation. In Principles of Public Finance (pp. 205-227). Springer, Singapore.