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Question: 1 15 marks suppose that the government of australia has...

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1. (15 marks) Suppose that the government of Australia has decided to increase tax revenue by imposing a per unit tax on the suppliers soft drinks (Coca-Cola, Pepsi, etc.).  

 

(a) Using a supply and demand model, show and explain the impact that the per unit tax had on the equilibrium price and quantity of soft drinks. (4 marks) 

 (b) Using the diagram created for your answer to (a), show and explain what effect the per unit tax had on consumer surplus, producer surplus and deadweight loss. (6 marks)   

 (c) What factors determine who the tax incidence falls on? What can we say about the overall welfare effects of government taxation? (5 marks) 

2.(10 marks) Suppose that wheat farmers in the hypothetical country of Cordinia are known to use harmful pesticides to reduce costs and increase their profits. However, chemicals from these pesticides have been found to leak into Cordinia’s rivers and contaminate the local seafood supply. As a result, local fisheries have seen a large decrease in demand for their products.  

 

(a) Use a model of market failure to show and explain the differences between the marginal private costs, marginal external costs, and marginal social costs that result from the production of wheat in Cordinia. (5 marks) 

 (b) Using the diagram created for your answer to (a), show and explain how private bargaining between the farmers and the fisheries may result in a Pareto-efficient allocation. (5 marks) 

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