(a) Explain, with the use of diagrams, the different effects on the price and quantity of a product of the removal of a subsidy and the removal of an indirect tax on that product. [8] by CJB

DIAGRAM(S)

CJBurrows — 2015-11-28 17:59:22 UTC

ANON (CJB edited)

2015-11-30 09:39:24 UTC

The removal of tax would decrease the price of the product and the removal of a subsidy would increase the price. The decrease in price caused by the removal of the tax would result in INCREASED WILLINGNESS TO SUPPLY AT ANY GIVEN PRICE LEVEL. THIS WILL RESULT IN AN EXTENSION OF 🙈🍆

The increase in price caused by the removal of the subsidy would MEAN PRODUCERS ARE WILLING TO SUPPLY LESS AT ANY GIVEN PRICE. This IN TURN WILL cause A CONTRACTION OF demand.

Removal of tax

2015-11-30 09:39:47 UTC

With a removal of tax, the supply increases from S to S1. The equilibrium with the tax was price P and quantity Q, but with the removal of the tax the price decreases to P1 and the quantity increases to Q1.

Removal of tax

2015-11-30 09:44:17 UTC

With the removal of tax, both the producer surplus and consumer surplus increases

2015-11-30 09:44:33 UTC

The removal of a subsidy or an indirect tax eliminates the deadweight loss that exists when the tax/subsidy is in place. The removal of either a tax or subsidy allows for a more efficient allocation of resources, as the market is able to determine the quantity supplied and at what price.

The removal of a tax decreases the price of a good but increases the quantity supplied at any given price. The diagram shows this (equilibrium price/quantity moves fromQP to Q1,P1).

Removal of tax

2015-11-30 09:46:34 UTC

The increased consumer surplus is shown by the area efg and the increased producer surplus is shown by the area bcd with the removal of the tax.

2015-11-30 09:50:38 UTC

The removal of a subsidy shifts the supply curve to the left. Consequently, price is increased and quantity supplied reduces; equilibrium price/quantity shifts from (Q,P) to (Q1,P1). Although irrelevant to the question, producer and consumer surplus are reduced (HJI➡️HD)

2015-11-30 09:55:03 UTC

Removal of subsidy will lead to a loss of both consumer surplus and producer surplus.

HOWEVER IT REMOVES THE DEADWEIGHT LOSS.

CJB

CJBurrows — 2015-11-30 11:37:40 UTC

You should begin by DEFINING terms i.e. indirect tax, subsidy

CJB

CJBurrows — 2015-11-30 11:49:17 UTC

JDM is quite right. The question calls for an explanation on price and quantity. So these observations (whilst right) don't address the question.

CJB

CJBurrows — 2015-11-30 11:52:41 UTC

It could however be relevant to comment on the degree of price or quantity change arising due to PED or Es.

CJBurrows — 2015-11-30 13:29:57 UTC

CJBurrows — 2015-11-30 13:30:52 UTC

CJBurrows — 2015-11-30 13:31:41 UTC