The imposition of a tax involves an “excess burden.” How would you show a similar result with a general equilibrium diagram (Note: With the general equilibrium diagram, you must be more precise about how tax revenue is used.) Figure 11.3 How Perfectly Competitive Prices Bring about Efficiency▸ DetailsQuantity ofY per weekPY₁Y*Efficient prices (slope = P*/P)Initial prices (slope = P1/P₁)C*U30X₁X*P'X'₁Quantity ofX per weekWith an arbitrary initial price ratio, firms will produce X₁, Y₁ ; the economy's budgetconstraint will be given by line CC. With this budget constraint, individuals demand X,Y', that is, there is an excess demand for good X(X-X₁) and an excess supply ofgood Y(Y₁-Y). The workings of the market will move these prices toward theirequilibrium levels Px, Pỷ. At those prices, society's budget constraint will be given bythe line C*C*, and supply and demand will be in equilibrium. The combination X*,Y* of goods will be chosen, and this allocation is efficient.

Deadweight loss, in economics, refers to the inefficiency created when the market equilibrium for a…

The imposition of a tax involves an “excess burden.” How would you show a similar result with a general equilibrium diagram (Note: With the general equilibrium diagram, you must be more precise about how tax revenue is used.)

The imposition of a tax involves an “excess burden.” How would you show a similar result with a general equilibrium diagram (Note: With the general equilibrium diagram, you must be more precise about how tax revenue is used.)

ENGR.ECONOMIC ANALYSIS

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Chapter1: Making Economics Decisions

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Question

Figure 11.3 How Perfectly Competitive Prices Bring about Efficiency
▸ Details
Quantity of
Y per week
P
Y₁
Y*
Efficient prices (slope = P*/P)
Initial prices (slope = P1/P₁)
C*
U3
0
X₁
X*
P'X'₁
Quantity of
X per week
With an arbitrary initial price ratio, firms will produce X₁, Y₁ ; the economy's budget
constraint will be given by line CC. With this budget constraint, individuals demand X,
Y', that is, there is an excess demand for good X(X-X₁) and an excess supply of
good Y(Y₁-Y). The workings of the market will move these prices toward their
equilibrium levels Px, Pỷ. At those prices, society's budget constraint will be given by
the line C*C*, and supply and demand will be in equilibrium. The combination X*,
Y* of goods will be chosen, and this allocation is efficient.

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