Partial Equilibrium Models Per-unit taxes NeXt, impose a per-unit tax of Su in this market Key insight: In the presence of a tax, the price paid by consumers and price received by producers differ Before, the supply-and-demand system was used to determine a single price; now there is a separate price for each 16
16 Partial Equilibrium Models: Per-unit taxes • Next, impose a per-unit tax of $u in this market. – Key insight: In the presence of a tax, the price paid by consumers and price received by producers differ. – Before, the supply-and-demand system was used to determine a single price; now there is a separate price for each
Partial Equilibrium Models Per-unit taxes How does the tax affect the demand schedule? Consider point a in Figure 12.1. Pa is the maximum price consumers would pay for Qa The willingness-to-pay by demanders does NOT change when a tax is imposed on them. Instead the demand curve as perceived by producers changes Producers perceive they could receive only(Pau)if they supplied Qa. That is, suppliers perceive that the demand curve shifts down to point b in Figure 12.1 17
17 Partial Equilibrium Models: Per-unit taxes • How does the tax affect the demand schedule? – Consider point a in Figure 12.1. Pa is the maximum price consumers would pay for Qa . – The willingness-to-pay by demanders does NOT change when a tax is imposed on them. Instead, the demand curve as perceived by producers changes. – Producers perceive they could receive only (Pa–u) if they supplied Qa . That is, suppliers perceive that the demand curve shifts down to point b in Figure 12.1
Partial Equilibrium Models Per-unit taxes Performing this thought experiment for all quantities leads to a new, perceived demand curve shown in Fiqure 12.2 This new demand curve. D. is relevant for suppliers because it shows how much they receive for each unit sold 18
18 Partial Equilibrium Models: Per-unit taxes • Performing this thought experiment for all quantities leads to a new, perceived demand curve shown in Figure 12.2. • This new demand curve, Dc ’ , is relevant for suppliers because it shows how much they receive for each unit sold
Figure 12.2 Price paid by consumers Tax revenues= kohn E Original price P EL- Price received Dy producers D QQ Gallons of champa
Figure 12.2
Partial Equilibrium Models Per-unit taxes Equilibrium now consists of a new quantity and two prices (one paid by demanders, and the other received by suppliers The supplier's price(Pn) is determined by the new demand curve and the old supply curve The demander's price Po=Pn+u Quantity Q, is obtained by either D(Pa)or S(Pn)
20 Partial Equilibrium Models: Per-unit taxes • Equilibrium now consists of a new quantity and two prices (one paid by demanders, and the other received by suppliers). – The supplier’s price (Pn ) is determined by the new demand curve and the old supply curve. – The demander’s price Pg=Pn+u. – Quantity Q1 is obtained by either D(Pg ) or S(Pn )