The Local Community Is Considering Two Options to Raise Money

question 55

Essay

The local community is considering two options to raise money to finance a new civic center. The first option is to institute a per unit tax on restaurant meals of $2.46. The market demand and supply functions for restaurant meals are: Q_D = 800,000 - 6,000P and Q_S = 14,500P - 225,000. Calculate consumer and producer surplus with the per unit tax. The second option the community is considering implementing is an income tax. If an income tax is implemented, the new demand for restaurant meals is: Q'_D = 794,875 - 6,000P. Calculate the level of consumer and producer surplus in the restaurant market with the income tax. Which of the two options will reduce the sum of consumer and producer surplus the least?

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Definitions:

Consumer Surplus

The divergence between the expected payment by consumers for a product or service and the actual payment made.

Producer Surplus

The difference between the amount producers are willing and able to supply goods for versus the amount they actually receive due to market prices.

Total Surplus

The sum of consumer surplus and producer surplus, representing the total net gain to society from the production and consumption of goods and services.

Tariff Revenue

Income that a government collects from imposing duties on imported goods.