Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson,Christopher Snyder

Exercise 15

In Chapter 9 we showed that the imposition of a tax involves an ''excess burden.'' How would you show a similar result with a general equilibrium diagram such as Figure? (Note: With the general equilibrium diagram, you must be more specific about how tax revenue is used.)
With an arbitrary initial price ratio, firms will produce X1, Y1; the economy's budget constraint will be given by line CC. With this budget constraint, individuals demand X01 , Y1, that is, there is an excess demand for good X (X01_ X1) and an excess supply of good Y (Y1 _ Y01 ). The workings of the market will move these prices toward their equilibrium levels P_X ,P_Y. At those prices, society's budget constraint will be given by the line C*C*, and supply and demand will be in equilibrium. The combination X*, Y* of goods will be chosen, and this allocation is efficient.