Define the dead weight loss of a unit excise tax

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Reference no: EM13976350

a. Define the dead weight loss of a unit excise tax on a particular good. Explain what it measures.

b. Draw a graph of possible supply and demand curves for a particular good for which the deadweight loss (DWL) from a unit excise tax is about half as big as the tax revenue raised. Show the DWL in your graph and justify the claim that it is about half as big as the tax revenue. Give an example of a good for which the supply and demand curves might look like the ones you drew. Explain why the curves might look the way you drew them for that good.

c. The DWL of a unit excise tax on certain goods is probably negative. Give an example of such a good. Draw possible supply and demand curves for that good and justify the shapes of the curves you drew. Show the magnitude of the DWL from the tax in your graph and explain why the DWL is negative for this good.

d. Draw possible supply and demand curves for a good such that the sellers bear none of the burden of a unit excise tax that they must pay. Show the tax, the market price and the effective price for the sellers when the tax is imposed. Give an example of a real good that probably has supply and demand curves like the ones you drew. Explain why the supply and demand curves for this good are likely to be as you drew them. Explain how the sellers of this good can avoid bearing the burden of an excise tax they pay.

Reference no: EM13976350

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