(15 points) Suppose that the state has recently legalized medical marijuana, and

Question

(15 points) Suppose that the state has recently legalized medical marijuana, and, as a condition of legalization, has imposed an excise tax of $60 per unit sold (to be collected by the retail establishment/dispensary). The inverse demand in this market is given by P 15002, and the supply is given by P30L- 2. 100 ' a. Solve for the market equilibrium in the absence of the tax. b. Solve for the market equilibrium with the tax enacted (PB, Ps, QTax). c. What is the buyer's tax incidence? d. Calculate the deadweight loss associated with the tax

Explanation / Answer

2. a. Demand for marijuana: P = 150 – 1/100Q; Supply: P = 30 + 1/50Q

Demand equals supply at equilibrium.

150 – 1/100Q = 30 + 1/50Q

150 - 20 = 0.02Q + 0.01Q

Q = 120/0.03

Q = 4000.

P = 150 – 0.01(4000)

P = $110.

b. Market equilibrium with the tax enacted:

P – 60 = 30 + 0.02Q

P = 90 + 0.02Q

Equating this with demand equation:

90 + 0.02Q = 150 – 0.01Q

0.03Q = 60

Q = 60/0.03

Q = 2000.

P = 150 - 0.01(2000)

P = $130. (Buyers pay).

c. Buyer’s tax incidence:

Buyer’s tax incidence = $130 – 110 = $20 tax per unit.

Seller’s pay = $60 – 20 = $40.

d. Deadweight loss:

DWL = 1/2 x (4000-2000)(60)

Deadweight loss associated with the tax = $6000.

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