The inverse demand function for portable electric heaters is P=220-Q and the supply function is P=20+3Q. Find the competitive equilibrium in the market of portable electric heaters (price and quantity) and represent it graphically. Compute the consumer surplus, producer surplus, and total welfare corresponding to the equilibrium found at point (a) and represent them on the graph. The government believes portable electric heaters are a very inefficient way of space heating. For this reason, it introduces a specific tax of 20 for each portable electric heater sold. Find the new quantity exchanged on the market after the introduction of the tax, the price paid by the buyers, and that received by the sellers. 

Compute the new consumer surplus, producer surplus, and total welfare after the introduction of the tax and represent them on the graph. Does the government’s intervention generate a loss of welfare? 

If yes, explain why and compute it. Use the price elasticity of demand and supply in the original competitive equilibrium to say which side of the market is more affected by the tax (i.e. does the burden of taxation falls more heavily on consumers or producers based on their price elasticities?). Confirm your answer by looking at the changes in consumer and producer surpluses pre-and post-tax.

In what other ways could the government have obtained the same result (i.e. same final market price and quantity)? 

Are those to be preferred to the specific tax which has been used?

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