Question

Consider a market for homogeneous medicinal plants produced in a constant cost-competitive industry. Suppose that a $10 per unit tax is imposed on medicinal herbs and that the government collects the tax from the medicinal plant farms (producers). This is a more conceptual based question rather than calculation based.

a. How will that tax be shared between consumers and producers in the short run?

b. How will that tax be shared between consumers and producers in the long run?

c. How did the imposition of the sales tax impact producer surplus in the long run? Why did the tax impact producer surplus in this way? What could be changed so that the change in producer surplus (in the long run) from the tax would be larger?

Answer 1