Question

In: Economics

Assume a constant cost industry. Assume it is a competitive market and that the market is...

Assume a constant cost industry. Assume it is a competitive market and that the market is in a long-run equilibrium. Graph this.Show what happens in both the short run and the long run if the government imposes a one-time tax of $200 on each firm. That is, no taxes will ever again be imposed. What if the firm does not believe that no taxes will ever again be imposed, could this change your analysis?

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Expert Solution

A tax is a compulsory financial charge. Taxes serve to discourage consumption and also to raise revenue for the government. This tax revenue is used for government spending. There are two type of taxes :direct tax and indirect tax. In the case of market situation, indirect tax is applicable.An indirect tax is levied on expenditure.While it is collected from seller, sellers will often pass some of this tax onto the buyers of their products.

Impact of tax

The government introduces a specific tax, increasing the cost of production for. As they are paying the save tax for rach unit sold, the new supply curve is parallel to the initial supply curve. After the tax has been imposed, we can see the supply curve shifts leftward. The new, higher market price is Pc and the new, lowed market Quantity is Q1.Therefore the impact of a specific tax on a product with elastic demand is to reduce equilibrium Quantity and raise price.

Rahul Sunny answered 1 year ago
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