Government And Tax

2. Chapter - 8
7. The government places a tax on the purchase of sales.
a. Illustrate the effect of this tax on equilibrium price and quantity in the stock
market. Identify the following areas both before and after the imposition of the
tax: total spending by consumers, total revenue for producers and government
tax revenue.
b. Does the price received by producers rise or fall? Can you tell whether total
receipts for producers rise or fall? Explain.
c. Does the price paid by consumers rise or fall? Can you tell whether total
spending by consumers rise or falls? Explain carefully. If total consumer
spending falls, does consumer surplus rise? Explain.
Solution:
a. Before the tax, the equilibrium price and quantity are determined by the
intersection of the demand and supply curves. After the tax, the price paid by
consumers rises, and the price received by producers falls. The quantity
transacted decreases due to the tax burden.

3. • Total spending by consumers: falls, as the higher price reduces the quantity
demanded.
• Total revenue for producers: falls, given the lower quantity sold and reduced price
received.
• Government tax revenue: Depends on the elasticity of demand and supply, it may
or may not increase.
b. The price received by producers falls due to the tax. Whether total receipts
rise or fall depends on the price decrease’s impact on quantity sold- if the
decrease in price results in a proportionally larger decrease in quantity, total
receipts falls.
c. The price paid by consumers rises after the tax. The impact on total consumer
spending depends on the elasticity of demand. If demand is inelastic, it may not
change significantly. If total consumer spending falls, consumer surplus may
still rise if the decrease in quantity is proportionally larger than the increase in
price, leading to a net gain in consumer surplus. Remember, the outcomes are
contingent on the elasticities of demand and supply.

4. 4. Many observes believe that the levels of pollution in our society are too high.
a. If society wishes to reduce overall pollution by a certain amount, why is if
efficient to have different amounts of reduction at different firms?
b. Command-and-control approaches often rely on uniform reductions among
firms. Why are these approaches generally unable to forget the firms that should
undertake bigger reduction?
c. Economists argue that appropriate corrective taxes or tradable pollution rights
will result in efficient pollution reduction. How do these approaches target
approaches target the firms that should undertake bigger reductions?
Chapter - 10

5. a. Since firms all generate pollution for different reasons and as the result of different types
of activities, it is reasonable to believe that the cost of reducing or eliminating pollution will
vary by firm. Therefore, it is optimal for firms to pay the same amount (proportionally) in
the effort to reduce pollution. However, even though firms may put the same amount of
money towards reducing pollution, the level of pollution reducing will certainly vary. This is
efficient because it prevents over-penalizing firms who would find it very difficult to reduce
their emissions.
b. Uniform reductions are those that require all the firms to reduce their own pollution by
the same amount. This is ineffective in targeting firms that should undertake bigger
reductions because it does not consider the cost or difficulty involve in reducing pollution
each firm. Generally the firms that should undertake bigger reductions are those who can do
it relatively easily compare to other firms-this way pollution is reduced at a lower overall
cost.

6. c.
• Pogovion taxes penalize firms for every unit of pollution - only firms that would
find it more expensive to educe their emissions would opt for the tax. All other firms
would take action to reduce their pollution, which would be cheaper than paying this
tax.
• Tradeable pollution rights impose a sort of bidding system where the holder of right
is permitted to pollute a certain amount. Since firms who would have a difficult time
reducing emissions would value these rights the most, they would be willing to pay
the most to hold these rights. If the pollution rights where held by a firm that didn't
value it as highly, they would be more likely to sell it since they would profit as a
result.