Looking for the answer to sub-part e 2. Taxation and comparative statics with sm

Question

Looking for the answer to sub-part e

2. Taxation and comparative statics with small changes: We have analyzed in class the situation where a tax is imposed on sellers of a product starting from the equilibrium condition : D(P*(t)) yielded the following equation S(P*(t)-). Our work dP*(r) where PD-P(t) is the price paid by consumers and Ps-P(t)- is the price received by suppliers. Thus, can be interpreted as the consumer tax incidence of a specific tax (r) levied on firms is the tax Supplier's tax incidence. dP*(T) Given this approach to this tax, consider a related scenario, the imposition of a specific tax () that is paid directly to the government by consumers rather than by firms In this scenario the price sellers receive is equal to the market price of P*(t), with this tax, what is the total price that consumers pay in equilibrium? Using general demand and supply functions, write the equilibrium condition for this tax scenario. a. b. Draw a graph illustrating the impact of this tax - be sure to start with the market in equilibrium without the tax and then illustrate the impact of the tax on the market. In what way does the interpretation of P*(T) differ from the scenario where the tax is imposed on sellers? The equilibrium condition you specified in part (a) implies that the equilibrium market price P* is an implicit function of , and makes explicit that the amount paid by consumers and suppliers after the tax is imposed on the good. Use the equilibrium condition to find Using your results from above, give the consumer and seller tax incidences Based on your answer to (d), does it matter whether the tax is collected from the seller or buyer? Provide an economic intuition. c. dP*(T) dt Sign your answer. d. e.

Explanation / Answer

e) YES, it matters becuse the burden depends on the elasticity of supply and demand curve . If the supply is less elastic then burden will be more on consumers and if more elastic then burden will be more on sellers.

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