08 Jun Question Elasticity and taxation
Question
Elasticity and taxation
Consider the market for automobiles in Beijing City and Qingdao City (These two cities are located in China). Suppose the demand for automobiles in Beijing is given by: Q= 10000 The demand for automobiles in Qingdao is:Q= 8000 – 2PThe market supply for the two markets is identical, given by:
Q= 2P – 2000 Assume these two markets are totally separated from one another. (Chinese currency unit is RMB.)
(a) Find the equilibrium price and quantity in the automobile market in both Beijing and Qingdao.
(b) Calculate the price elasticity of demand in both Beijing and Qingdao at equilibrium.
(c) Calculate the price elasticity of supply in both Beijing and Qingdao at equilibrium.
Now suppose the local government in Beijing imposes an excise tax of RMB 1,000/car on the producers of automobiles and the local government in Qingdao imposes an excise tax of RMB 500/car on consumers of automobiles.
(d) Calculate the government revenue, consumers’ tax incidence, producers’ tax incidence, and deadweight loss in both Beijing and Qingdao due to the excise tax in each city.
(e) Compare the fraction of the economic incidence borne by consumers to the total tax incidence in both cities. Explain your results in terms of elasticity.
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