Answer each of the following:
1.
Explain the relationship between “shifting” and “economic incidence” of taxes. Indicate for each of the following taxes (1) whether the tax can be theoretically shifted and (2) who is likely to bear the economic incidence of the tax. Briefly explain each of your answers.

Federal income tax

State income tax

State general sales tax

Local tax on business property (property tax)

Local tax on owner-occupied residential property (property tax)

Local tax on rental residential property (property tax)
 $1 (per 3 minute wash cycle) excise tax on “hand-held wand” car washes

$5 (per dose) excise tax on insulin (an essential medication for diabetics)

$1 (per pound) excise tax on mangoes (a juicy, aromatic tropical fruit with a firm skin)

2.
Examine the graph below indicating the imposition of an excise tax on bourbon and then answer the questions that follow.
Supply tax
Price
P
$63
C Supply
55
43 B D
35
A
Demand

9 11
(x 1,000)
Cases of bourbon, week
If the government imposes an excise tax as shown, who bears the statutory incidence ?
Explain.

Who bears the economic incidence ? Explain.

What is the total amount of the tax paid by consumers? Show your calculations. Draw diagonal lines in the geometric area of the graph that represents the part of the tax paid by consumers.

What is the total amount of the tax paid by suppliers? Show your calculations. Draw opposite-slanting diagonal lines in the geometric area of the graph that represents the part of the tax paid by suppliers.

What is the amount of the tax per case of bourbon? Show your calculations.

What is the total revenue generated (to government) by the tax? Show your calculations.
Lightly shade the geometric area of the graph that represents the government’s tax revenue.

What is the excess burden or efficiency loss resulting from the tax? Show your calculations.
Shade ( more darkly ) the excess burden of the tax.

Calculate the price elasticity of demand between the equilibrium price and the new price paid by consumers as a result of the imposition of the tax. Briefly explain the connection between the price elasticity of demand you calculated and the economic incidence of the tax.

3.
How do direct controls (regulation) and specific taxes affect negative externalities [use pollution as an example]? Briefly explain in terms of supply and demand [yes, you should sketch a graph to illustrate]. Discuss the differences between these approaches on the one hand and marketable pollution permits [trading of pollution rights] on the other hand.

4.
Assume a state has made buying and selling pit bull terriers illegal and punishable under criminal laws by a substantial fine imposed on sellers. Animal control officers confiscate and euthanize dogs when sales are intercepted. Discuss the pros [if any] and the cons [if any] of the government’s decision to prohibit this market. Explain your answer using economic rather than moral or safety concepts. Sketch a graph to illustrate your points. Assume that the demand for pit bull terriers available for adoption is very price inelastic.

5.
In the handout material on externalities the authors discussed an apple market with negative externalities. Let’s consider a happier scenario in which the distribution of Buyer Values and
Seller Costs are the same as in the discussion, but the apple orchard uses no chemical sprays.
The beauty and fragrance of the orchard generate positive rather than negative externalities.
In fact, for every bushel of apples that is produced, everyone in the market gets a benefit worth $.50. Since there are 30 people in the market, the total value of the positive externalities generated by apple production is $.50 x 30 = $15. Now, complete the following
[for all items refer to the demand curve used in Figure D6.1, p. 191] :

Suppose that the government pays a subsidy of $15 to each supplier who sells a bushel of apples. The government finances this subsidy by requiring everybody in the market, whether or not they bought or sold apples, to pay 1/30 of the total cost of the subsidy.
Reproduce the supply and demand curves for this market from Figure D6.1. Then, use a dotted red line to show the change in the demand curve or the supply curve (whichever is applicable) that applies with the subsidy.

Without the subsidy, what does the model predict that the competitive price and quantity will be?

With the subsidy, what will the competitive price and quantity be?
 Without the subsidy, what does the model predict consumers’ surplus to be? What will sellers’ profits be? What will total profits be? [Be sure to show your calculations.]
 With the subsidy, what does the model predict consumers’ surplus to be? What will sellers’ profits be? What will total profits be? [Be sure to show your calculations.]

Explain why it is that the subsidy to apple production increases total profits by more than the cost of the subsidy.