Question

suppose the market for dry cleaning has an inverse demand of P = 10 â€" 0.15Q and an inverse supply curve (MC) of P = 0.05Q, where P is the price per article of clothing and Q is the quantity of clothing laundered. Suppose the external marginal cost of dry cleaning is $1. If the government tries to correct the negative externality by placing a $1 tax on each laundered piece of clothing, buyers will pay _____ and sellers will receive _____, net of the tax.

Answer 1

Answer:

The correct solution will be "$3.25; $2.25". The further explanation is given below.

Explanation:

The $1 tax could very well start creating a wedge between some of the price that producers and consumers start receiving.

⇒ $Pd-Ps=1: 10$

to

⇒ $0.15Q-0.05Q=1$

Attempting to solve the Q, we should get Q=45 equilibrium.

The market value that customers pay will be:

= $10-0.15\times 45$

= $3.25$ ($)

The cost that customers receive will be:

= $0.05\times 45$

= $2.25$ ($)