Suppose the U.S. supply and demand curves for automobiles cross at a price of $15,000 but (identical) automobiles can be purchased from abroad for $10,000. Now suppose the government imposes a $2,000 sales tax on every American who buys a car (regardless of whether the car is produced domestically or abroad).
a. What price must Americans pay for cars before the tax is imposed? What price must Americans pay for cars after the tax is imposed?
b. Before and after the tax is imposed, calculate the gains to all relevant groups of Americans. What is the deadweight loss due to the tax?

  • CreatedJanuary 24, 2013
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