Question

The market of oranges is perfectly competitive and the equilibrium price is 30€. The supply function in the market has a positive slope and the government is considering imposing a tax of 2€ per unit. Compute the prices the orange producers will receive and the consumers will pay at the new equilibrium if the market demand is perfectly elastic. Draw an appropriate graph and explain your findings.

Answer 1

The market of oranges is perfectly competitive. The equilibrium price is 30€. The supply function in the market has a positive slope and the market demand is perfectly elastic. This implies that the market price of 30€ is determined by the flat demand curve and upward sloping supply curve.

Now the government is considering imposing a tax of 2€ per unit. This tax will shift the supply function to the left. Price paid by buyers will not change and will be equal to 30€. This is because sellers will bear the entire tax burden and they now receive a price of 28€ after paying the tax of 2€.