Proposed reduction in the tax has on price and quantity

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Reference no: EM133552449

Questions relate to the following scenario: Imagine a good is currently taxed at a rate of 30% of its price. Assume there are no externalities for this good. The good is created from an intellectual property patent. To support producers of the good, the government is proposing to reduce the tax rate to 17%.

(1a) Show the effects (directions of change) that the proposed reduction in the tax has on price and quantity in a competitive market. Ensure you start your analysis from a situation where the larger (30%) tax is already in place.

(1b) Using a properly labelled version of the graph from question (1a) (or a new graph if that is easier) show the welfare effects of the proposed reduction in the tax. Ensure you consider the welfare changes of the individual parties involved, as well as society as a whole. Conclude by providing clear intuition (i.e., without referring to technical features from the graph) as to why this overall change in society's welfare occurs.

(1c) [graph] Consider instead a scenario where the good in question begins with no tax at all. The government wishes to support producers of the good and introduces a binding price floor. Show the effects of this price floor on a graph and compare it to the graph in part (1a). Are the effects (directions of change) of a price floor on price and quantity any different to the case of a reduction in tax?

(1d) Will the amount of tax revenue collected by the government increase or decrease because of the proposed tax reduction? Discuss in relation to the concept of elasticity.

2) The article states that: "the discount was to be limited to income from patents on medical and biological technologies, although (also before the bill became law) the 2022 budget announced plans to extend it to agricultural and low emission technologies." Why do you think the tax discount was initially limited to income from patents on medical and biological technologies over other patents?

3) What is the key difference between "research and development tax credits" versus the "patent box"? What are the likely differences in outcomes/effects between the two types of policies?

4) Questions (4a) to (4b) relate to the following scenario: Imagine a monopoly firm is supplying a good.

(4a) What are reasons a monopoly firm may be more likely to invest in research and development relative to a competitive firm? Relate to concepts learnt in the unit.

(4b) Assume initially that there is no positive externality associated with the good supplied by the monopoly firm. Depict on a graph the deadweight loss arising from such a monopoly. Now imagine instead that consumption of the good benefits even those who do not consume the good - that is, consumption of the good leads to a positive externality. Show whether the presence of this positive externality leads to a change in the initial deadweight loss. Conclude by providing clear intuition (i.e., without referring to technical features from the graph) as to why this difference arises.

Reference no: EM133552449

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