Consider the market for chocolate candy bars. Assume that it has “standard” supply and demand curves. Draw a diagram showing the market in equilibrium. Would we say that this is “efficient”? What does this mean in the context of the market model? justify. We would then like you to illustrate consumer surplus, producer surplus, tax revenue and deadweight loss in a market subject to a quantity tax diagrammatically. A similar exercise is illustrated in the Learning Materials. All you have to do is to construct an analogous case. Finally, it has been revealed that the government wants to implement the tax for public health reasons. That is, the government is not really interested in the tax revenue itself, but in reducing the consumption of candy bars to reduce obesity. Please provide answers to the following questions: Would this objective be better achieved for a market with elastic or inelastic demand? Why? Would your answer change if it transpired that the government only cared about maximising tax revenue and not substantially reducing chocolate bar consumption? Why? Considering the market for candy bars, which of the two do you think is more likely—a large tax revenue or a large reduction in consumption as the result of the given tax?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Consider the market for chocolate candy bars. Assume that it has “standard” supply and demand curves. Draw a diagram showing the market in equilibrium. Would we say that this is “efficient”? What does this mean in the context of the market model? justify.

We would then like you to illustrate consumer surplus, producer surplus, tax revenue and deadweight loss in a market subject to a quantity tax diagrammatically. A similar exercise is illustrated in the Learning Materials. All you have to do is to construct an analogous case.

Finally, it has been revealed that the government wants to implement the tax for public health reasons. That is, the government is not really interested in the tax revenue itself, but in reducing the consumption of candy bars to reduce obesity.

Please provide answers to the following questions:

Would this objective be better achieved for a market with elastic or inelastic demand? Why?
Would your answer change if it transpired that the government only cared about maximising tax revenue and not substantially reducing chocolate bar consumption? Why?
Considering the market for candy bars, which of the two do you think is more likely—a large tax revenue or a large reduction in consumption as the result of the given tax?

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