Final answer:
In the long run for a perfectly competitive market like barbershops, a government-imposed license fee would lead to a new equilibrium with potential price increases or output reductions. Firms unable to cover the fee would exit the market, and the fee would ultimately be paid by firms through reduced profits or consumers via higher prices. The market adjusts until firms again make zero economic profits.
Step-by-step explanation:
When the government imposes an annual license fee on barbershops, which are operating in a perfectly competitive market, it affects both the price and the output in the long run. Initially, the license fee will increase the costs for the barbershops, likely reducing the economic profits. As economic profits are reduced, in the long run, all barbershops will adjust by either increasing prices or reducing the quantity of haircuts provided if they cannot fully pass on the costs to consumers.
Eventually, the market will return to a new long-run equilibrium. Firms that can't cover the additional cost of the fee will exit the market, which will decrease supply and potentially increase prices until economic profits are zero again. In the long run, the fee is effectively paid by the firm in the form of reduced profits or by consumers in the form of higher prices, depending on the price elasticity of demand for haircuts.
In a model of perfect competition, in the long term, firms make zero economic profit as prices adjust due to entry and exit. Any additional costs, such as a license fee, will be absorbed either by the firm or passed on to consumers through price adjustments. This dynamic ensures that firms will not continuously make economic profits or losses in the long run.