I need help on improving these sample questions that are based on efficiency, equity, and the role of government
1. When the firms in an industry produce good A, costs are imposed on people who don’tproduce or consume that good.
- Suppose the government is considering taxing good A with a sales tax levied on each unit sold. How would this tax affect:
(i) The price that consumers pay for good A
The tax will increase the cost of production. This will decrease the supply of the good and increase the market price
(ii) The quantity of good A produced
The equilibrium quantity decreased (see graph in 1Ai).
(iii) The total revenues received after taxes by firms that produce good A
Can’t say for certain. It depends on whether the demand is elastic or inelastic.
- Compare and contrast the levels of economic efficiency achieved after this tax is imposed with the levels of economic efficiency achieved if good A were produced in an unregulated market.
Consumer surplus is smaller with the tax. But fewer additional costs are imposed on third parties, so the net effect on all consumers is unclear