Suppose that a state government is contemplating a sales tax on pesticides. Assume that the follow- ing equations model the pesticide market before the sales tax is enacted, where P is measured in price per pound, and Q is in thousands of pounds.
D ¼ MPB ¼ 30 - 4Q
S ¼ MPC ¼ -2:50 þ Q
Now assume that an efficient sales tax of 50 cents per pound is enacted, which shifts the supply curve to S′ = MPC′ = -2 + Q
a. Find the equilibrium price and quantity before and after the tax is implemented. Who pays the majority of the tax, suppliers or demanders? Explain why this makes economic sense.
b. How much revenue does the sales tax generate for the state? Suggest some environmentally motivated uses for these revenues.