Example 2: In fall of 2011, the National Christmas Tree Association decided to impose a fee/tax of $0.15 per tree sold.² They claimed the tax revenue raised would fund a new marketing campaign for Christmas tree growers in response to growing plastic tree imports. The proposal quickly drew controversy: some argued that the fee/tax would be passed along in higher prices to consumers, but the National Christmas Tree Association says no. How does the answer to this question depend on the assumption about the price elasticity of demand? a. Consider two graphs of the market for Christmas trees. The supply curve in each market is assumed to be the same. In the left graph, assume the price elasticity of demand is relatively inelastic and in the right graph, assume the price elasticity of demand is relatively elastic. Add labels on your diagram to identify the equilibrium price and quantity of trees before the tax. b. Now, suppose retailers are assessed a tax of amount for each tree sold. Show/label the impact of the tax on the supply curve in both markets (no calculation needed). c. Graphically determine the new quantity sold, the price paid by buyers, the price received by sellers of these Christmas trees in both markets (you don't need numbers here). d. Use your graph in part (a) to conduct a welfare analysis of the consumer surplus, producer surplus, government revenue, buyer's burden of the tax, seller's burden of the tax and dead weight loss to society before and after a tax is imposed. Consumer Surplus: Producer Surplus: Government Tax Revenue Buyer's Tax Burden Seller's Tax Burden Dead Weight Loss Before tax After tax
Example 2: In fall of 2011, the National Christmas Tree Association decided to impose a fee/tax of $0.15 per tree sold.² They claimed the tax revenue raised would fund a new marketing campaign for Christmas tree growers in response to growing plastic tree imports. The proposal quickly drew controversy: some argued that the fee/tax would be passed along in higher prices to consumers, but the National Christmas Tree Association says no. How does the answer to this question depend on the assumption about the price elasticity of demand? a. Consider two graphs of the market for Christmas trees. The supply curve in each market is assumed to be the same. In the left graph, assume the price elasticity of demand is relatively inelastic and in the right graph, assume the price elasticity of demand is relatively elastic. Add labels on your diagram to identify the equilibrium price and quantity of trees before the tax. b. Now, suppose retailers are assessed a tax of amount for each tree sold. Show/label the impact of the tax on the supply curve in both markets (no calculation needed). c. Graphically determine the new quantity sold, the price paid by buyers, the price received by sellers of these Christmas trees in both markets (you don't need numbers here). d. Use your graph in part (a) to conduct a welfare analysis of the consumer surplus, producer surplus, government revenue, buyer's burden of the tax, seller's burden of the tax and dead weight loss to society before and after a tax is imposed. Consumer Surplus: Producer Surplus: Government Tax Revenue Buyer's Tax Burden Seller's Tax Burden Dead Weight Loss Before tax After tax
Chapter14: Monopoly
Section: Chapter Questions
Problem 14.8P
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Transcribed Image Text:Example 2: In fall of 2011, the National Christmas Tree Association decided to impose a fee/tax of
$0.15 per tree sold.² They claimed the tax revenue raised would fund a new marketing campaign for
Christmas tree growers in response to growing plastic tree imports. The proposal quickly drew
controversy: some argued that the fee/tax would be passed along in higher prices to consumers, but the
National Christmas Tree Association says no. How does the answer to this question depend on the
assumption about the price elasticity of demand?
a. Consider two graphs of the market for Christmas trees. The supply curve in each market is assumed
to be the same. In the left graph, assume the price elasticity of demand is relatively inelastic and in
the right graph, assume the price elasticity of demand is relatively elastic. Add labels on your
diagram to identify the equilibrium price and quantity of trees before the tax.
b. Now, suppose retailers are assessed a tax of amount for each tree sold. Show/label the impact of the
tax on the supply curve in both markets (no calculation needed).
c. Graphically determine the new quantity sold, the price paid by buyers, the price received by sellers
of these Christmas trees in both markets (you don't need numbers here).
d. Use your graph in part (a) to conduct a welfare analysis of the consumer surplus, producer surplus,
government revenue, buyer's burden of the tax, seller's burden of the tax and dead weight loss to
society before and after a tax is imposed.
Consumer Surplus:
Producer Surplus:
Government Tax Revenue
Buyer's Tax Burden
Seller's Tax Burden
Dead Weight Loss
Before tax
After tax
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