In the discussion of Taxation and Economic Efficiency we move from discussing the effects of taxation...

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In the discussion of Taxation and Economic Efficiency we move from discussing the effects of taxation on equity to discussing the effects of taxation on efficiency, shifting our focus from the effect of taxes on market prices to their effect on market quantities. This discussion of tax efficiency is about the amount of social efficiency sacrificed by society when trades are impeded by the presence of taxation; the social efficiency effects of taxation are determined by the effect of taxes on quantities. The diagram in Figure 3 below is a demonstration of this Taxation and Economic Efficiency relationship. The figure shows the impact of a K5 per litre tax levied on producers of fuel. Before the tax is imposed, the demand curve for fuel is D1, the supply curve is S1, and the market is initially in equilibrium where they intersect at point A, with quantity Q1 (100 million litres) and price P1 (K15 per Litre). Study the diagram and answer the questions that follow. Price Per Liter Im Tax = KS P2= k18 * -Deadweight loss, DWL P1 = K15 A F P3 = K13 Q-90 Q-100 ju B viv 9... Qty in Millions of REQUIRED: A. Outline what happens in this market after the Government levies the K5 tax on the producers of fuel in terms of the marginal social costs. [3 Marks] B. What area would be used to measure the loss to the consumers' social surplus? [2 marks] In the discussion of Taxation and Economic Efficiency we move from discussing the effects of taxation on equity to discussing the effects of taxation on efficiency, shifting our focus from the effect of taxes on market prices to their effect on market quantities. This discussion of tax efficiency is about the amount of social efficiency sacrificed by society when trades are impeded by the presence of taxation; the social efficiency effects of taxation are determined by the effect of taxes on quantities. The diagram in Figure 3 below is a demonstration of this Taxation and Economic Efficiency relationship. The figure shows the impact of a K5 per litre tax levied on producers of fuel. Before the tax is imposed, the demand curve for fuel is D1, the supply curve is S1, and the market is initially in equilibrium where they intersect at point A, with quantity Q1 (100 million litres) and price P1 (K15 per Litre). Study the diagram and answer the questions that follow. Price Per Liter Im Tax = KS P2= k18 * -Deadweight loss, DWL P1 = K15 A F P3 = K13 Q-90 Q-100 ju B viv 9... Qty in Millions of REQUIRED: A. Outline what happens in this market after the Government levies the K5 tax on the producers of fuel in terms of the marginal social costs. [3 Marks] B. What area would be used to measure the loss to the consumers' social surplus? [2 marks]

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