Question

Q29: How would the S and D curves shift if a $2 tax was imposed on suppliers for each unit of milk sold? With visuals please explain how the following three effects are impacted by the tax.

(1) economic incidence

(2) dead weight loss

(3) welfare effects

Answer 1

Ans) When government imposes tax, it does not really matter upon whom the tax is imposed, burden of tax is shared by both buyers and sellers. Now who will bear greater burden of tax depends upon the elasticity of demand and supply. Accordingly, less elastic side of the market bears greater burden of tax.

When tax is imposed on sellers, supply curve shifts to the left by the amount of tax.

Tax increases the price paid by buyers and decreases the price received by sellers. As a result both consumer surplus and producer surplus decreases. Further, tax also leads to welfare loss i.e deadweightloss.

consumer surplus Eam no producer surplus Qe

Above figure shows situation without tax.

/J S tax burden on buyers ea nec evenue tax burden on sellers tax burden on QT Qe

Above figure shows the situation with tax. Tax has shifted supply curve to the left. Both consumer and producer surplus is decreased and there is deadweightloss.