Economics 20th Edition by Campbell McConnell ,Stanley Brue ,Sean Flynn

Exercise 11

ADVANCED ANALYSIS Suppose the equation for the demand curve for some product X is P = 8 -.6 Q and the supply curve is P = 2 +.4 Q. What are the equilibrium price and quantity? Now suppose an excise tax is imposed on X such that the new supply equation is P = 4 +.4 Q. How much tax revenue will this excise tax yield the government? Graph the curves, and label the area of the graph that represents the tax collection "TC" and the area that represents the efficiency of the tax "EL." Briefly explain why area EL is the efficiency of the tax but TC is not.