Question - In Boomtown government officials are considering implementing an excise tax on the producers of tennis balls. They have called you in to analyze the impact of this proposed tax. Currently (before the excise tax) market demand and market supply of tennis balls is given in Boomtown are given by the following equations where P is the price per case of tennis balls and Q is the quantity of cases of tennis balls:
Market Demand: P = 90 - (3/2)Q
Market Supply: P = 20 + (1/4)Q
The government officials propose implementing an excise tax of $7 per case of tennis balls on producers. Use this information to answer the following set of questions. Be sure to show how you got your answers.
a. Intuitively, implementation of this tax will cause which curve in our demand and supply graph to shift? Explain the direction of this shift and how this shift will impact equilibrium price and equilibrium quantity in this market once the excise tax is imposed.
b. With the imposition of this excise tax, how much tax revenue will be collected by the government in Boomtown?
c. With the imposition of this excise tax, what will be the change in consumer surplus relative to the initial level of consumer surplus?
d. With the imposition of this excise tax, what will be the change in producer surplus relative to the initial level of producer surplus?
e. What is the deadweight loss due to this excise tax? Verify that the sum of (CS with the tax + PS with the tax + Tax revenue + Deadweight Loss) is equal to the value of total surplus prior to the imposition of the excise tax. (If it is not, then you have made a math error and you need to redo the problem to correct this error.)
f. Calculate the consumer tax incidence (CTI) and the producer tax incidence of this excise tax. Who bears the greater economic burden of this excise tax? Explain your answer.
g. Suppose the government would like to decrease consumption of tennis balls to 28 cases. How big an excise tax would the government need to implement to reach this goal?