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Problem: Optimal Commodity Taxation. Demand for some commodity equals P = 90 - 3Q, while the supply is perfectly elastic at the price P = 30.
Required:
Question 1: Before the tax is implemented, what is the equilibrium quantity Q??
Question 2: What is the tax revenue from a tax of $t per unit? What is the deadweight loss of an excise tax of $t per unit? Write these as a function of the tax t. It may be helpful to draw a picture.
Question 3: What is the marginal deadweight loss (MDWL) of an increase in the tax? What is the marginal revenue (MR) of an increase in the tax?
Question 4: If the value of government revenue is λ = 41 , use the Ramsey rule to find the optimal per unit tax t .
Question 5: Now, suppose that there is a negative externality created by the production of this commodity. The marginal damage is MD = 15 per unit. What is the new optimal commodity tax?
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