Answer Problem Chapter 6
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Phạm Minh TâmAnswer Problem Chapter 6
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Phạm Minh Tâm- Impact of Taxation
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Powered by AIThe distribution of the tax burden depends on the relative elasticities of supply and demand. In this scenario, the heavier burden borne by consumers (24 billion VND) compared to producers (4.8 billion VND) suggests that the demand is less price elastic than the supply . With inelastic demand, consumers are less sensitive to price changes, bearing a larger portion of the burden. Conversely, if demand were more elastic, the tax burden would shift more towards producers.
The tax results in governmental revenue of 28.8 billion VND, which can be used for public expenditures . However, the market distortions it creates, as evidenced by a deadweight loss of 1.2 billion VND, suggest that while the government gains financial resources, the market suffers inefficiencies, reducing economic welfare and suggesting only a partially efficient redistribution of wealth. The effectiveness depends on the use of tax revenues and whether they can offset market disutilities.
The pre-tax gross revenue is calculated as the product of the pre-tax equilibrium price and quantity, GR0 = P0 x Q0 = 10,000 x 52 = VND 520 million or 52 billion VND. The post-tax gross revenue, taking into account the consumer's price Pc = VND 15,000, is GR1 = Q1 x Pc = 48 x 15,000 = VND 720 million or 72 billion VND .
The imposition of a VND 6,000 consumption tax shifts the demand curve from QD = 72 - 2P to QD' = 66 - 2P. The new equilibrium condition, equating the modified demand curve with the supply curve, becomes 66 - 2P = 12 + 4P, resulting in a post-tax equilibrium price P1 = VND 9,000 and a quantity of Q1 = 48 hundred thousand boxes. Thus, the tax causes the equilibrium price to decrease from VND 10,000 to VND 9,000, and the equilibrium quantity to decrease from 52 to 48 hundred thousand boxes .
After the tax is implemented, the tax burden is distributed with consumers paying Tc = 48(15 - 10) = VND 240 million or 24 billion VND, and producers paying Tp = 48(10 - 9) = VND 48 million or 4.8 billion VND . The burden on consumers is significantly higher, reflecting their lesser price elasticity of demand as compared to producers' supply elasticity.
The consumption tax reduces consumer surplus as consumers now pay a higher price (VND 15,000) than before (VND 10,000), while purchasing fewer goods (48 instead of 52 hundred thousand boxes). Similarly, producer surplus decreases as they receive a reduced effective price (VND 9,000 per box). The reduced surpluses indicate lost economic welfare and illustrate the deadweight loss in the market.
Before the tax, producers received VND 10,000 per box, which was also the price paid by consumers. After the tax, the price paid by consumers increased to VND 15,000, while the net price received by producers decreased to VND 9,000 per box. This disparity highlights the effect of tax incidence, showing a transfer of economic burden from producers to consumers post-taxation .
The equivalence under taxation decreases the equilibrium quantity from 52 to 48 hundred thousand boxes, which suggests that some consumers and producers exit the market due to the higher effective prices and lower revenues respectively. This reduction in market transactions creates inefficiencies, as indicated by the deadweight loss of 1.2 billion VND . Hence, resources are not allocated optimally, resulting in lost potential gains from trade, thereby reducing overall market efficiency.
The government's taxation policy creates a total deadweight loss of ΔW = 1/2 x (52 - 48) x (15 - 9) = 12 million VND or 1.2 billion VND . This signifies a reduction in societal welfare as resources are allocated less efficiently and potential market transactions are lost. Additionally, the tax revenue generated is T = 48 x (15 - 9) = 288 million VND or 28.8 billion VND , which shows the trade-off between increased government revenue and reduced market efficiency.
The tax-induced deadweight loss from the consumer's side is ΔWc = 1/2 x (15 - 10) x (52 - 48) = 10 million VND or 1 billion VND. On the producer's side, it is ΔWp = 1/2 x (10 - 9) x (52 - 48) = 2 million VND or 0.2 billion VND . This loss represents the inefficiencies in the market caused by the tax as certain transactions that would have occurred in a tax-free market no longer take place.
