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ECON 103

Who really bears a tax?

Follow a per-unit tax through prices, burdens, revenue and lost gains from trade. Learn how elasticity and tax size change the outcome, then solve 10 questions with worked answers.

Prices and the wedge · Step 1 of 12

Find the trades worth making

Mossglow lantern market
Price ($ per lantern)
Q0P0EDS
Quantity (lanterns)
D; S. Marked point E.
D: demandS: supply
E: 30 lanterns at $40
Mossglow lanterns are an invented product, and all numbers here are invented. Demand is P = 100 − 2 × Q and supply is P = 10 + 1 × Q, with Q in lanterns and P in dollars per lantern. With no externalities, the crossing gives the efficient quantity: buyers’ value equals sellers’ cost for the next lantern.
Try it: Move quantity to either side of the crossing. Compare value with cost.
Quantity of lanterns30
Buyer value
$40
Seller cost
$40
Next trade
Value equals cost
Q* = (100 − 10) ÷ (2 + 1) = 30; P* = (100 − 2 × (30)) = $40.
At Q = 30: buyer value = (100 − 2 × (30)) = $40.
Seller cost = (10 + 1 × (30)) = $40.
Value less cost = (40 − 40) = $0. Value equals cost.
Check yourself
Without externalities, the efficient last unit has…

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