Suppose a good is produced in a constant-cost industry.The market price is $4 and the equilibrium quantity is 20.After a tax is imposed on the good,the price rises to $5 and the equilibrium quantity falls to 18.The amount of the tax is

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Quizplus · Accepted Answer

The amount of the tax is more than $1 per unit sold because the price to consumers increased by $1 (from $4 to $5), but this does not account for the portion of the tax that producers bear. The tax shifts the supply curve upward, causing both the price to consumers to rise and the quantity sold to decrease. The fact that the quantity sold decreased indicates that part of the tax burden was absorbed by producers in the form of lower equilibrium quantity, suggesting the tax per unit is more than the $1 increase in price seen by consumers.

Suppose a Good Is Produced in a Constant-Cost Industry