Question

For the following identify the effect on the supply and the demand curve and on the equilibrium price and quantity:

Fast foods - The government has placed a tax on restaurants serving foods high trans fat and saturated fat. People have found out that foods high in trans fat and saturated fat are harmful to one’s health

Answer 1

Solution:

Since people have found that mentioned fats are harmful, they will be less willing to consume it. As a result, the demand curve will shift to the left (since, at same price, they'll be willing to buy less now) lowering the equilibrium levels of price and quantity.

Furthermore, the tax government has placed on the sellers of fast food (simply, the restaurants) will have an effect of creating a wedge between the price that buyers pay and price that sellers receive. None of the curves will shift, however the equilibrium level of quantity will be even lower, and the equilibrium will no more be efficient (due to price gap of buyers and sellers as a result of government intervention). The wedge part is taken away by the government in form of taxes, and burden of tax is shared by both agents (sellers as well as buyers) in the society.

Following diagram will help understand this scenario better: