The U.S. government imposes an excise tax of $38.20 per passenger on all transatlantic flights.
a) What determines who bears the burden (i.e., the economic incidence) of this tax?
b) Who do you think will bear more of the burden of this ticket tax: a business traveller whose trip is essential for work versus a tourist with flexible travel plans? Why? Explain.
a) If Pfizer is a monopolist in the market for the cholesterol-lowering drug, Lipitor, with constant marginal costs of production of $1/dose (i.e., MC = 1) and faces a daily demand curve (inverse demand function) of the form
P=11
1
200
Q
P=11-1200Q
, what will be the profit maximizing price and quantity for Pfizers output if it must charge the same price to every consumer?
b) If Pfizer were able to charge a different price to consumers depending on whether or not they have private health insurance, how will this affect producer surplus (in qualitative terms) relative to the situation in (a) where it can only charge a single price? How will this affect market efficiency? Explain.
c) Assuming no other market imperfections or externalities, how will this ticket tax distort behavior in the market for transatlantic air travel, and how will this affect economic efficiency?
d) BONUS: Suppose that the marginal cost of transatlantic air travel is constant and that demand is linear and downward sloping (as usual). How will the burden of the ticket tax be shared between consumers and producers if the airline industry is perfectly competitive? What if airlines have market power (i.e., the industry is imperfectly competitive)?
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