Answer Happy

The market for cigarettes has the following supply and demand
functions:
𝑄𝑠 = 8 + 3𝑃𝑆
𝑄𝐷 = 20 ―𝑃𝐷
where 𝑃𝑆 and 𝑃𝐷 denote the prices (in pounds) received by sellers
and price paid by buyers
respectively, and 𝑄𝑠 and 𝑄𝐷 denote the quantities supplied and
demanded respectively. Similarly,
the market for potato crisps has the following supply and demand
functions:
𝑄𝑠 = 20 + 𝑃𝑆
𝑄𝐷 = 40 ―𝑃𝐷
(a) The government is considering levying a per unit tax of £1 on
cigarettes. Calculate how this tax
will affect the quantity and price in the market for cigarettes. [5
marks]
(b) Suppose that the government were to instead levy a £1 per unit
tax on potato crisps. How
much revenue would this tax generate? [5 marks]
(c) Suppose the government wants to raise £1 in tax revenue, and
wants to do so by levying a per-
unit taxes on either cigarettes or crisps (but not both), in such a
way that the excess burden of
taxation is minimized. Given this objective, which of the two
commodities should be taxed?
Calculate and compare the excess burden associated with the tax on
each of the two commodities
to justify your answer. [10 marks]