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The imposition of a tax involves an “excess burden.” How would you show a similar result with a general equilibrium diagram (Note: With the general equilibrium diagram, you must be more precise about how tax revenue is used.)

The imposition of a tax involves an “excess burden.” How would you show a similar result with a general equilibrium diagram (Note: With the general equilibrium diagram, you must be more precise about how tax revenue is used.)

Economics (MindTap Course List)
Economics (MindTap Course List)
13th Edition
ISBN:9781337617383
Author:Roger A. Arnold
Publisher:Roger A. Arnold
Chapter30: Market Failure: Externalities, Public Goods, And Asymmetric Information
Section30.2: Internalizing Externalities
Problem 2ST
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The imposition of a tax involves an “excess burden.” How would you show a similar result with a general equilibrium diagram (Note: With the general equilibrium diagram, you must be more precise about how tax revenue is used.)

Figure 11.3 How Perfectly Competitive Prices Bring about Efficiency ▸ Details Quantity of Y per week P Y₁ Y* Efficient prices (slope = P*/P) Initial prices (slope = P1/P₁) C* U3 0 X₁ X* P'X'₁ Quantity of X per week With an arbitrary initial price ratio, firms will produce X₁, Y₁ ; the economy's budget constraint will be given by line CC. With this budget constraint, individuals demand X, Y', that is, there is an excess demand for good X(X-X₁) and an excess supply of good Y(Y₁-Y). The workings of the market will move these prices toward their equilibrium levels Px, Pỷ. At those prices, society's budget constraint will be given by the line C*C*, and supply and demand will be in equilibrium. The combination X*, Y* of goods will be chosen, and this allocation is efficient.
Transcribed Image Text:Figure 11.3 How Perfectly Competitive Prices Bring about Efficiency ▸ Details Quantity of Y per week P Y₁ Y* Efficient prices (slope = P*/P) Initial prices (slope = P1/P₁) C* U3 0 X₁ X* P'X'₁ Quantity of X per week With an arbitrary initial price ratio, firms will produce X₁, Y₁ ; the economy's budget constraint will be given by line CC. With this budget constraint, individuals demand X, Y', that is, there is an excess demand for good X(X-X₁) and an excess supply of good Y(Y₁-Y). The workings of the market will move these prices toward their equilibrium levels Px, Pỷ. At those prices, society's budget constraint will be given by the line C*C*, and supply and demand will be in equilibrium. The combination X*, Y* of goods will be chosen, and this allocation is efficient.
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