Question

Assume that the firms marginal cost equal to p=q and that the demand function is given by p=10.assume also that the producers also have to pay a tax equal to t per unit produced

A show in a figure who bears the burden of the tax and explain

Show the tax revenues and the welfare loss

Answer 1

Initial equilibrium is A where perfectly elastic demand at P = 10 meets marginal cost (supply curve) at P = Q to determine Q = 10.

A tax 't' is imposed on sellers so supply is shifted to the left. New equilibrium is at B where consumers still pay the same pre tax price and price recived by sellers falls by exactly the amount of tax. Market quantity is reduced to 10 - t and there is a dead weight loss (orange coloured). Tax revenue are taxes x quantity purchased and the same is shown by green coloured region. Entire tax burden is borne by seller