Suppose market demand for oranges is given by QD = 40 - 2P where QD is quantity demanded and P is the market price. Market supply is given by QS = 4+P where QS is quantity supplied and P is the market price. Equilibrium price is 12 and quantity is 6.
a. Suppose that the government imposes a $3 tax on the good, to be included in the posted price (i.e. tax paid by suppliers). What is new equilibrium posted price? How much of that price do producers keep? What is the new market equilibrium quantity? What is the loss in surplus for consumers? Producers?
b. Suppose instead of the tax, the government limits quantity to be no more than 14 units. Compare this policy, in terms of how it impacts producers and consumers, to the tax. What would producers prefer, the quantity restriction or the tax?