Question

Name: Andre Fleury Date: 1. The market for bathroom cleaners can be defined by this set of equations: Qd = 24 - 2P Os = 4+2P where P is the price of bathroom cleaners in dollars, and is quantity in thousands. When bathroom cleaners are washed down the drain, they cause environmental poisoning. The government estimates that the external cost related to the use of each container of bathroom cleaner is $3 and is considering imposing a tax of $3 on the producers of the bathroom cleaner. Using this information, answer the following questions. a. What are the market price and market quantity in the bathroom cleaner market? b. What is the social cost of this quantity of bathroom cleaner? c. If producers are charged a tax of $3, this would cause the supply curve to shift to the left, and the new equation for the supply curve would be (= 4 + 2(P - 3). What is the efficient quantity traded in this market as a result of the tax? d. Draw a graph to illustrate the old and new equilibriums in this market (before and after the tax) e. What is the dollar amount of the deadweight loss that would be removed from this market as a result of the tax?

Answer 1

The solution is given below:

a at equilibrium, Qd = Qs =) 24-2P = - 4+28 =) 24+4 = 2p+2P => 28 = 4P = P = Q = -4+2.7= 14-4 =10 Market jorice of bathroom Clearner is 7, market Quantity is 10.

D As theore is an external cost of bathroom Clearneer equivalent to the amount $3, social cost =$(7+3) = $10. C. Qs =-4+2 (P-3) = -4+2P-6=-10+2P Qd remains unchanges ay 24-2P at the equi li borium, 26-212 = -10+2p 7 34= 4P = P = 34/4 = 17/2 = 8.5 Q = -10+2.17/2 = 17-10=7 the efficient quantity toraded in the market cas a cesult of the tax = 7 --S

e tax 7. - - - --S - - - - - - - T 77 10 The initial equilibrium was at E where the equilibrium price = 7, equilibrium quantity = 10. Now, as tax is. implemented on the produceurs, Supply Curve Shifts upward and demand curre cremains unchanged. The new equilibrium is at point E' where the mauret-clearing price and quantity are 8-5 and 7 respectively. As tax coreates a distortionary effect , porice of bath orcom elearner increases whereas Quantity falls.