Answered: (a) Show the market for housing in…

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter6: Supply, Demand And Government Policies

Section: Chapter Questions

Problem 10PA

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Question

(a) Show the market for housing in equilibrium on a diagram, where demand is less elastic than supply, and
label the respective consumer and producer surpluses. Discuss whether this market is Pareto efficient.

(b) Assume that the State Government imposes a per-unit tax on the sellers of houses. A new diagram,
shows the imposition of this tax on the market for housing. Does the imposition of this tax cause a Pareto
improvement to the market, explain?

(c) Is the tax imposed in part (b) effective for the collection of Government revenue? Justify your answer with
reference to your diagram in part (b).

Definition Definition Consumer surplus is the consumers' gain from trade. The consumer surplus is the area below the demand curve but above the equilibrium price, up to the equilibrium quantity. Producer surplus is the producer's gain from trade. The producer surplus is the area above the supply curve but below the equilibrium price, up to the equilibrium quantity. Consumer surplus is represented by Area A and producer surplus is represented by Area B.

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