What is the post-tax equilibrium price paid by passengers?

Expert Solution

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Question:

Answer:

Tax may be imposed on buyer or seller. If it imposer on buyer then the buyers bear /pay it. But if impose on seller or producers then it will by the consumers again. If the government impose tax on the seller/producer than the the seller/producer add tax in price that increase price and the consumers bear that price. Suppose the the price of bus ticket is $10 and the government imposed 10% tax on seller then the seller will increase the price of ticket by $11 and now the passanger will pay for $11 for the bus ticket now. The reason is that ultimately the buyer cares only about the total price paid, which is the amount the supplier gets plus the tax; and the supplier cares only about the net to the supplier, which is the total amount the buyer pays minus the tax. According to demand theory when price increase its decrease demand and vice-versa. So, here the increasing price of bus ticket will decrease demand for the service and demand curve shift left from D1 to D2.

Graphical representation:

Suppose the current equilibrium point is "E" and now decreasing demand shift demand curve left from the D1 to D2. Now new equilbrium point is E2 where price nad demand both decrease from P1 to P2 and Q1 to Q2 respectively.

Graph:

Thank You

Rahul Sunny answered 1 year ago

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