2. The demand for smartphones is given by D(p) 400, where p is the price of a sm

Question

2. The demand for smartphones is given by D(p) 400, where p is the price of a smartphone and p is the price of a tablet (a substitute for smartphones). The supply is given by S(p = 4-p The price of tablets is f xed and set at pT = 500. T_F Suppose that the government imposes two taxes on phones: a S30 tax to be paid by the consumers and $70 tax that producers have to pay. (a) What is the economic incidence of this policy? (b) What is the excess burden here? (c) How would economic incidence change if government imposed instead a $70 tax on consumers and a $30 tax on producers (d) Imagine that the tax on producers increases to $120, while the tax on consumers remains unchanged at $30. How does the excess burden change? Divide the change in excess burden into components coming from the surplus of each of the parties involved. (e) Which component of the change in excess burden is the largest? Explain why

Explanation / Answer

Both market and bank-based financial systems have their own comparative advantages. For some industries at certain times of their development, market-based financing is advantageous. For example, financing through stock markets is optimal for industries where there are continuous technological advances and where there is little consensus on how firms should be managed. The stock market checks whether the manager's view of the firm's production is a sensible one. For other industries, bank-based financing is preferable. This holds in particular for industries which face strong information asymmetries. Financing through financial intermediaries is an effective solution to adverse selection and moral hazard problems that exist between lenders and borrowers. Banks in particular have developed expertise to distinguish between good and bad borrowers. Economies that have both well-developed banking sectors and capital markets thus have an advantage. Furthermore, in times of crisis in either system, the other system can perform the function of the famous spare wheel.

Related Questions

Navigate

• Browse (All)
• Browse 2
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.