Brazilian Government Impose Tax on Producers of Mahogany


Added on  2020-02-18

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ECONOMICSMahogany TimberSTUDENT ID:[Pick the date]

ECONOMICSPART Aa)Based on the given description, the Brazilian government has put a tax on the producers ofmahogany so that to ensure that there is reduction in the harvest. The requisite diagram isindicated below.It is apparent that the original supply curve is indicated by S1. However, in response to theproducer tax, the supply curve shifts upwards (S2) to indicate a decrease in supply due tohigher cost. As a result, there is an increase in the equilibrium price (P2 to P1) andcorresponding decrease in the equilibrium quantity (Q2 to Q1) considering the new point ofintersection between the demand curve and the new supply curve. Further, there is adecrease in both the consumer and producer surplus as indicated by the stripes areas.Earlier, the deadweight loss was zero but due to imposition of the producer tax,deadweight loss has arisen. Hence, it may be concluded that welfare is adversely impacteddue to imposition of producer tax.b)The impact of imposition of quota can be understood with the help of the followingdiagram.

ECONOMICSImposition of quota makes sense at a value which is less than the equilibrium quantity whichis the case here. As a result, there is a clear demand supply mismatch as the demand is higherwhile the corresponding supply bounded by the quota is lower. As a result, there is anincrease in the price which is clearly highlighted in the above diagram. In this process, theconsumer or buyer surplus tends to decrease as they have to pay a higher price. On the otherhand, the producer or seller surplus tends to increase as they are able to receive a higher pricefor mahogany. However, in the process there is a deadweight loss which earlier was notpresent and clearly, the imposition of quota leads to decrease in overall welfare. c)(i) Since producers fear punishment, hence there would be a decrease in the overall supplycaused due to shifting of the supply curve in the upwards direction. Further, since there isstigma associated with consumption of mahogany products, thus, there would be adecrease in the demand as well which would be indicated by the shift of the demand curvein the downwards direction. The relevant diagram is shown below.

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