## Calculate the market price, Taxation

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In an effort to reduce alcohol consumption, the government is considering a \$1 tax on each gallon of liquor sold (the tax is levied on producers). Suppose that the supply curve for liquor is upward sloping and its equation is  Q = 30,000P (where Q is the number of gallons of liquor and P is the price per gallon). The demand curve for liquor is Q 500,000 - 20,000P.

a.  Calculate the market price, the price paid by consumers, and the price received by sellers, before and after the tax is levied.

b.  Calculate the elasticities of demand and supply at the pre-tax equilibrium price and quantity and relate these elasticity numbers (qualitatively) to your findings in part (a).

c.  From part (a) (and the change in quantity) calculate the change in consumer surplus and the change in producer surplus resulting from the tax.

d.  How much revenue does the tax raise? How might the researcher allocate these revenues when analyzing the incidence of the tax burden?

Read the paper by Ruggeri and Bourgeois (2009) posted on Blackboard. They note that a carbon tax affects carbon emissions by changing the prices of the taxed fuels relative to prices of all other goods and services in the economy, thus providing an incentive for reducing the consumption of carbon-based fuels. This shift in prices has implications for the distribution of the tax burden across individuals in the economy. In particular, this shift takes place at three levels: (1) fuels used in electricity generation; (2) energy used by the industrial-commercial sector; and (3) energy used directly by the final consumer (the residential and public administration sectors). Summarize the authors' analysis of the shifting of tax burdens that occurs across each of these three broad levels of the economy.

6.  What is meant by the "retail sector" of an economy? The article by Bird and Smart on tax incidence notes that a large portion of Provincial Retail Sales Taxes in Canada are in fact paid on business inputs, such as cars, tools, groceries for restaurants, etc.). In other words, many producers have to pay the RST. Use a demand and supply diagram to analyze the impact of the portion of the RST being levied on producers. Draw your diagram in such a way as to represent the authors' findings about the tax incidence of the RST paid on business inputs.

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