Consider a perfectly competitive market with market supply and market demand . Suppose the government imposes an excise tax of $4 per unit on this market. What are the net benefits from this tax?

Question

Consider a perfectly competitive market with market supply  and market demand  . Suppose the government imposes an excise tax of $4 per unit on this market. What are the net benefits from this tax?

Quizplus · Accepted Answer

To determine the net benefits from the tax, we need to calculate the change in consumer surplus, producer surplus, and tax revenue.

Before the tax, the equilibrium price is $12 and the equilibrium quantity is 8. At this price, consumer surplus is (1/2)(11-12)(8) = $4 and producer surplus is (1/2)(12-3)(8) = $36.

After the tax, the supply curve shifts up by $4, and the new equilibrium price is $14. The new equilibrium quantity is 6. At this price, consumer surplus is (1/2)(11-14)(6) = $9 and producer surplus is (1/2)(14-3)(6) = $55.

Tax revenue is the per-unit tax multiplied by the quantity sold, which gives ($4)(6) = $24.

Net benefits from the tax can be calculated as the sum of the change in consumer surplus, producer surplus, and tax revenue. This gives a net benefit of ($9 - $4) + ($55 - $36) + $24 = $48.

Therefore, the best choice is C.

Consider a Perfectly Competitive Market with Market Supply and Market