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If taxes affect both demand and supply, discuss the effect of an increase in taxes on...

If taxes affect both demand and supply, discuss the effect of an increase in taxes on the equilibrium price and quantity.

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Expert Solution

Answer:

Effect of tax on equilibrium quantity

When there is tax, the quantity falls to a level where the difference between before tax demand and before tax supply is equal to the amount of tax.

As a result, there is dead weight loss and there is fall in consumer surplus.

Effect of tax on equilibrium price

Also, the equilibrium price is higher for consumer due to the extra tax burden that they have to bear.

Rahul Sunny answered 2 years ago
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