Economics revision help?
If a tax of $10 is imposed on sellers, What quantity should be bought and sold? How much tax is paid by seller?
Any sorta help would be appreciated. Its not homework, i'm doin my revision for finals.
Answer:
It depends on if the tax is $10 total or $10 per unit of output and the nature of competition.
A $10/unit tax shift the average cost curve and marginal cost curve up by $10. If it is $10/producer, the the average cost curve is shifted up by $10/q for all q, but there is no change to the marginal cost curve.
Either way, the rules to find the market clearing price and q are the same. For a monopoly, set the new MC = MR and for a perfectly competitive market, p=min(AC).
In competitive markets, none of the tax is paid by the seller in the long run. Prices for the product being taxed will be raised to pay for the tax, and the consumer ends up paying. This is not because producers can instantly raise prices to cover the tax. Initially, the tax may reduce profits. However, if profits are reduced below the minimum required to justify investment in this industry, supply will eventually decline and raise prices enough to cover the tax without reducing profits of those producers that remain. The same can be said of a wage increase demanded by unions. The end result is that consumers pay for this higher cost and not the company in the form of reduced profits.
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