Question 1 Consider product Y with the following demand and supply functions: Qd = 100 – 2p Qs = -20 + 4p The government has not currently imposed an indirect tax on product Y. However, the production...

no referencing needed


Question 1 Consider product Y with the following demand and supply functions: Qd = 100 – 2p Qs = -20 + 4p The government has not currently imposed an indirect tax on product Y. However, the production and consumption of product Y is considered undesirable. Subsequently, the government imposes an indirect tax on the product. The consumer pays a price of $24 per unit after tax. Assume the product has an income elasticity coefficient of +1.5. Use the above information to undertake the following: 1. Draw a demand and supply graph illustrating the market for Product Y both before and after the imposition of the indirect tax. (2.5 marks) 1. Calculate the per unit tax. (0.5 marks) 1. Calculate and explain consumer surplus, producer surplus and deadweight loss before and after the imposition of the indirect tax. (3 marks) 1. Calculate and interpret the own price elasticity of demand using the arc method. (1 mark) 1. Calculate and explain the burden of the tax. Discuss the relationship between the burden of the tax and the coefficient of elasticity calculated in part iv. (2 marks) v. The government increases direct (income) tax by 8% and this decreases average disposable income by 2%. Use the case study above as a guide to discuss the impact of this policy on the demand for Product Y. (2 marks) vi. Explain whether the government is likely to reduce indirect taxes or increase direct taxes in order to discourage the consumption of Product Y. (2 marks) Question 2 Use the following information and the graph, which illustrates the market for a pesticide with no government action, to answer the questions below. An upstream factory produces pesticide, and creates waste, which it dumps into a river on the outskirts of this town in regional Victoria. Farmers are located downstream which must filter the water before they can use it. The marginal external cost of the waste is $50 per tonne of pesticides produced. i. What is the market price and quantity of pesticide produced? Briefly explain (0.5 marks) ii. What is the socially optimal price and quantity of pesticide produced? Briefly explain. (0.5 marks) iii. Discuss the market failure evident in this market. Your answer should include a discussion of the most significant economic concepts relating to this market failure. Concepts that should be included but not limited to are: allocation of resources, type of externality, how market failure arises. (3 marks) iv. Re-draw the graph of the market for pesticide which demonstrates and illustrates the market failure discussed above in part (iii). (1 mark) v. Briefly discuss one government option available in correcting market failure in this market. (2 marks)