Friday, March 10, 2006

Pizza

Okay, the market for piza is characterized by a normal downward sloping demand curve and an upward sloping supply curve.

a. Suppose the government forces each pizzaria to pay a $1 tax on each pizza sold. What happens to CS, PS, tax revenue & DWL in comparison to the same areas before the tax was imposed?

b. If the tax were removed, pizza eaters and sellers would be better off, but the government would lose tax revenue. Suppose that consumers and producers voluntarily transferred some of their gains to the government. could all parties (including the government) be better off than they were with a tax?

4 comments:

Reid said...

a. Okay, the producer surplus and consumer surplus will decrease and the dead weight loss and the tax revenue will increase.

b. I would have to argue that this wouldn't really happen. In all honesty, rational people think on the margin, then why would people voluntarily give up money. Unless they could right it off as a tax deductable donation. If they did do this though, I don't think that the government would be better off because people probably wouldn't give the equivalent of the tax up to the government.

KM said...

Excellent points, Reid.

There is no way to meet what the government would impose. So...consumers, producers & the gov are all worse off - consumers and producers lose more money (even voluntarily), so they aren't happy with the higher price to be paid, and the government wouldn't get enough revenue, so they wouldn't be happy.

Bethany said...

b) Ok, so we all accept that this is an impossible scenario. But, let's just say the producers and consumers voluntarily do give the government enough to reach the tax revenue. The economy would be MUCH better off because the dead weight loss would be eliminated. Let's suggest it to our legislators.

forsnic said...

i guess i can go along with this although it is not true. i agree with reid, the PS and CS will dec., there will now be a DWL and tax rev. in response to removing the tax, i think the gov has much bigger issues with money than revenue from pizzarias. i mean if all we eat were pizza then i could forsee this being a big concern, but whatev.