Final answer:
Imposing a tax on razor blades in a market with inelastic supply and elastic demand creates a price wedge between what consumers pay and what producers receive, leading to a new, lower equilibrium quantity (Qt). The supply curve shifts leftward, and the tax incidence disproportionally affects sellers in this case.
Step-by-step explanation:
When analyzing the impact of a government tax on razor blades, where the market is initially in equilibrium with marginal benefit equal to marginal cost, the imposition of a tax creates several effects. If the supply of razor blades is inelastic and the demand is elastic, introducing a tax generates a wedge between the price consumers pay (Pc) and the price producers receive (Pp). This gap represents the tax amount, with consumers facing a higher price, while producers receive less for each unit sold, therefore bearing the tax burden.
The tax effectively raises the cost of production, typically resulting in a leftward shift of the supply curve. This shift leads to a new equilibrium point where the quantity traded in the market decreases to Qt. Additionally, depending on whether the supply is inelastic or elastic, the tax incidence can disproportionately affect either consumers or sellers. In markets with inelastic supply, sellers bear a larger portion of the tax burden, while in markets with elastic supply, they can potentially adjust their production and thus pass on more of the tax burden to consumers.