The market for soda beverages

The market for soda beverages demand is QD = 90-20P and supply is QS = 30P-10. Price is measured in dollars per one-gallon bottle and quantity in millions of one-gallon bottles

  1. a) Find the equilibrium quantity and price in the market for soda and compute Consumer Surplus and Producer Surplus when the market is in equilibrium. As that problem noted, sweetened beverages contribute to the over consumption of high-fructose corn syrup with negative consequences for public health. Suppose that each extra one-gallon bottle of soda sold in the market imposes a $1 external cost on state and federal governments that see Medicare and Medicaid diabetes-related expenditure increase.
  2. b) What is the total external cost that the soda beverages industry imposes on the government? Suppose that a $1 per bottle tax is imposed on sellers of soda beverages. What is the new equilibrium price and equilibrium quantity in the market for soda beverages?
  3. c) How much consumer surplus and how much producer surplus are lost due to the tax and how much revenue does the tax raise?
  4. d) The tax reduces consumption of soda beverages and the external cost they impose on local and federal governments. By how much? Overall, does the introduction of the tax raise or reduce social welfare? Discuss.
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