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The government imposes a tax on a market. What are the 4 market clearing conditions after...

The government imposes a tax on a market. What are the 4 market clearing conditions after a tax is in place? a. Write each condition out. Make sure you understand how to solve for equilibrium P and Q with a tax.

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Expert Solution

The government imposes a tax on a market. Mareket clearing conditions after a tax in place:

1. Tax amount should be divided between buyers and sellers which depends on he elasticity of demand and supply.

2. Buyers must pay the more amount than pay under without tax.

3. Sellers receive less amount than receive under absence of tax.

4. Difference between what buyers pay and what sellers receive represents the amount of tax

Pd -Ps =t

5. Market clearing condition without tax is:

Qd(P)= Qs(P)

Market clearing condition after tax is:

Qd (Pd) = Qs(Pd -t)

or

Qd(Ps +t) = Qs(Ps).

This is how we solve for the equilibrium P and Q with tax. Because when the tax imposes , if it imposes on sellers ,then Supply curve shifts to the left. And market clearing condition is Qd(Pd) = Qs(Pd -t) . After solving this, we get what buyers pay i.e Pd . And sellers recieve = Pd-t.

And if the tax imposes on buyers ,then demand curve shifts to the left. And market clearing condition is Qd(Ps+t) = Qs(Ps) . After solving this ,we get what sellers receive i.e Ps. And buyers pay = Ps+t.

Rahul Sunny answered 2 years ago
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