Supply of good A is perfectly inelastic. Suppose a tax is levied on buyers. Draw a...

Supply of good A is perfectly inelastic. Suppose a tax is levied on buyers. Draw a graph to show the impacts on the market for good A. Your graph should indicate the CS, PS, tax revenue and DWL after tax.

Solutions

Expert Solution

If tax is levied n buyers, the demand curve would shift inward indicating a decrease in the quantity demanded. This is illustrated by the graph below:

when tax is imposed on hte buyers, the whole burden of tax passes on to sellers.This is because whether the tax is imposed on buyers or sellers, it is shared by both the parties according to the elasticity of demand and supply curve. As supply is directly inelastic, the whole burden falls on sellers. Now, the price paid by buyers remains unaffected. It is the same at P. However, seller receive a price -less- tax, P1.

There is no deadweight loss as the quantity supplied does not decrease when tax is imposed (supply is inelastic).

Buyers pay P, sellers receive P1. The difference is the tax revenue. Or, Tax revenue is the amount of tax*quantity sold. the yellow area is the tax revenue.

Consumer surplus is the area of the triangle above th pri line and below the demand curve. As pric does not change for the consumers, demand remains unchanged. Consumer surplus also remains unchanged.

Rahul Sunny answered 1 month ago

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