Question

If the government imposes unit sales tax (i.e., $ tax per unit sold) on a product, which one, demand, or supply will shift? Increase or decrease? Will the new tax cause "disequilibrium"? Please state clearly about the shift (leftward or rightward) and the equilibrium price and quantity change. No graph is required.  

Answer 1

We agree that if the government-imposed unit sales tax, then the price of the product goes up, no matter who pays the difference between the original product and the new taxed product. The supply curve would have no effect here because firms will most likely pass the imposed tax to its customers by increasing the final price of the product. A change that will occur is the marginal cost per unit would be increased, thus causing a higher or lower quantity to be supplied at a given price. Only when prices go up, will demand decreases, enabling the demand curve to shift leftwards due to the imposed sales tax. Demand decreases when producers increase the cost of their goods or services. When fewer people buy the product there is a surplus of supply because the quantity offered excessed quantity demanded. This new tax would cause disequilibrium to occur due to increasing the market price, which could potentially be above the equilibrium. The quantity supplied would also be greater than the quantity demanded which would cause this negative effect on the producer. In order to reestablish equilibrium, prices would have to fall and quantity demanded would have to increase since consumers are willing to buy more of a product at a lower price..