Question

Suppose the government imposes a 50-cent tax on the sellers of packets of chewing gum. The tax would a. shift the supply curve upward by less than 50 cents.b. raise the equilibrium price by 50 cents. c. discourage market activity. d.create a 50-cent tax burden each for buyers and sellers.

Answer 1

A tax imposed on sellers leads to a change in the supply curve and equilibrium price, thereby affecting market activity and tax incidence on buyers and sellers. The actual burden depends on the elasticity of supply and demand.

Step-by-step explanation:

When a government imposes a tax on sellers, it affects the supply curve and the equilibrium price. The tax creates a wedge between the price consumers pay (Pc) and the price producers receive (Pp), leading to a decrease in the quantity sold (Qt). The burden of the tax, known as tax incidence, can fall on both the buyers and the sellers, but not necessarily equally. In inelastic supply scenarios such as beachfront hotels, the tax burden falls more on sellers, while in markets with more elastic supply like tobacco, the burden shifts more to consumers. Taxes affect overall market activity and can either discourage it or lead to reduced revenue for the government if the supply and demand are elastic.