Section Notes 16, Econ 100A Spring ’06 1Section Notes 16Covering material from Lecture on March 9thClass Outline1. Specific Tax and Tariffs1 Specific Tax and TariffsA tariff is a type of tax. A specific tax is one that sets an additional cost to each unit that goes to thegovernment. Therefore, for a specific tax of t, the price to a consumer would be PC= PP+ t, where PPis the price of a good to a producer. Notice, we could similarly think about this as a tax on producers, orPC− t = PP.Problem: (P&R, Chapter 9, Exercise 7)The annual demand for imorted coffee by U.S. consumers is given by the demand curve Q = 250 − 10P ,where Q is quantity and P is price. Assume all coffee is imported. World producers have a constantmarginal and average cost of pro ducing coffee at $8 per pound. U.S. distributors can in turn distributecoffee for a constant $2 per pound. The U.S. coffee market is competitive. Congress is considering a tariffon coffee of $2 per pound.a. If there is no tariff, how much do consumers pay for a pound of coffee? What is the quantity demanded?b. If the tariff is imposed, how much will consumers pay for a pound of coffee? What is the quantitydemanded?c. Calculate the lost consumer surplus.d. Calculate the tax revenue collected by the government.e. Does the tariff result in a net gain or a net loss to society as a whole?Section Notes 16, Econ 100A Spring ’06 2Problem: (P&R, Chapter 9, Exercise 15)In 1998, Americans smoked 23.5 billion packs of cigarettes. They paid an average retail price of $2 perpack.a. Given that the elasticity of supply is 0.5 and the elasticity of demand is −0.4, derive linear demand andsupply curves for cigarettes.b. In November 1998, after settling a lawsuit filed by 46 states, the three major tobacco companies raisedthe retail price of a pack of cigarettes by 45 ce nts. What is the new equilibrium price and quantity?How many fewer packs of cigarettes are sold?c. Cigarettes are subject to a federal tax, w hich was about 25 cents per pack in 1998. This tax increasedby 15 cents in 2002. What does this increase do to the market-clearing price and quantity?d. How much of the federal tax will consumers pay? What part will producers
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