Question

The demand curve for a good equals P=100-Q. The private supply curve is given by P=10. However, the supply of the good is associated with external costs of 10 per unit. If the government imposes a Pigou tax on the good.

How large will the resulting tax revenue be?

Answer 1

The resulting tax revenue can be calculated by finding the difference between the original market price and the price received by producers after the tax is imposed. To find the tax revenue, you need to calculate the new equilibrium quantity and multiply it by the tax rate. In this case, the tax revenue will be $900.

Step-by-step explanation:

The resulting tax revenue can be calculated by finding the difference between the original market price and the price received by producers after the tax is imposed.

1. First, find the quantity at the original equilibrium by setting the demand and supply equations equal to each other: 100-Q = 10. Solve for Q to get Q = 90.
2. Substitute the value of Q into either the demand or supply equation to find the original market price. Using the demand equation P=100-Q, P = 100 - 90 = 10.
3. Next, calculate the price received by producers after the tax is imposed by subtracting the amount of the tax from the market price. In this case, the tax is equal to the external cost of 10 per unit, so the price received by producers is 10 - 10 = 0.
4. Finally, calculate the tax revenue by multiplying the quantity at the new equilibrium (Qt) by the tax rate. In this case, the tax rate is 10 per unit and the new quantity (Qt) is 90, so the tax revenue is 10 * 90 = 900.

Therefore, the resulting tax revenue will be $900.