Suppose that a market is initially in equilibrium.The initial demand curve is The initial supply curve is Suppose that the government imposes a $3 tax on this market.How much of this $3 tax is paid by consumers?

Question

Suppose that a market is initially in equilibrium.The initial demand curve is  The initial supply curve is  Suppose that the government imposes a $3 tax on this market.How much of this $3 tax is paid by consumers?

Quizplus · Accepted Answer

When a tax is imposed on a market, the price paid by consumers will increase and the price received by the producers will decrease. The tax burden is shared by both the consumers and the producers, but the amount paid by each depends on the price elasticity of demand and supply. In this case, the initial equilibrium price is $5 and the quantity exchanged is 10 units. With a $3 tax, the supply curve shifts up by $3 and becomes P = 2Q + 13. The new equilibrium price will be $6 and the quantity exchanged will be 9 units. The price paid by consumers will increase from $5 to $6, which is a $1 increase. Therefore, consumers will bear $1 of the $3 tax.

Suppose That a Market Is Initially in Equilibrium