Calculate the change in eu welfare due to the tax

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Reference no: EM132461196

Consider the perfectly competitive market for fossil fuels (in MMBTUs) facing the European Union(EU). Price taking fossil fuel consumers outside of the European Union (Rest of World or ROW) have a demand function given by:

P = 2100 - 2/4Q

Price taking fossil fuel consumers within the European Union have a demand function given by:

P = 2100 - (2/-3)Q

Price taking fossil fuel suppliers have a supply function given by:

P = (100 - 333.33) + 1/3Q

For the sake of calculating welfare below, assume that the EU and ROW equally split total producer surplus. Suppose that there are no external damages from fossil fuel production or consumption.

Suppose the European Union is considering an excise tax on its own fossil fuel consumers of $25/MMBTU. This is equivalent to the excise tax driving a wedge between its own demand for fossil fuels and the net supply curve facing the EU (net supply = supply -demand from ROW).

Calculate the change in EU welfare due to the tax. Calculate the change in ROW welfare due to the tax.
Calculate the deadweight loss due to the tax(change in global welfare due to tax).

Reference no: EM132461196

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