6. To curb the demand for a good, a policy maker proposes imposing a sales tax o

Question

6. To curb the demand for a good, a policy maker proposes imposing a sales tax on seller, which will shift the supply curve from S to Sr. Another policy maker proposes rationing that caps the quantity sold in market at Q1 If rationing is implemented, competition among consumers for the limited quantity will push the price up to P o mark the areas clearly, the graph covered part of S,. Here is the graph that shows the complete S (1). (8 pts) Fill in the table using letters in the graph above (left CS PS Social welfare DWI Sales Tax Rationing (2). (2 pts) Which policy is superior? A. Sales Tax; B. Rationing; C. Same D. Not enough information to determine

Explanation / Answer

1) deadweight loss is e+f. This is same for both tax and rationing. This is so because both reduces the supply curve in the same way, shift it leftwards.

e+f is the surplus lost due to rationing or tax.

2) Same

Both are same as both results in same deadweight loss

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