Tax be defensible in spite of the deadweight loss

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Reference no: EM137800

Q. A country that does not currently tax cigarettes is considering the introduction of a $0.40 per pack tax. The economic advisors to the country estimate the supply and demand curves for cigarettes as:

Qd = 140,000-25,000P
Qs = 20,000+75,000P

where Q= daily sales in packs of cigarettes and P = price per pack. The country has hired you to provide the following information regarding the cigarette market and the proposed tax:

a) Elucidate what are equilibrium cost and quantity with no tax?

b) Elucidate what cost and quantity would prevail after the imposition of the tax? What portion of the tax would be borne by purchaser and supplier, correspondingly?

c) Calculate the deadweight loss from the tax. Elucidate the tax be defensible in spite of the deadweight loss? Elucidate what tax revenue will be produced?

Reference no: EM137800

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