Answer to Question #138352 in Microeconomics for lauranonato

Question

Suppose a P1,000 tax was levied on buyers rather than the sellers.
The original equilibrium quantity is 750 units and the equilibrium price is P7,000.
1. Analyze the tax burden using demand, supply and elasticity (Hint: the demand curve shifts vertically downward by the amount of the tax). Label your graph properly then answer the following and show in your graph;
The new price for the commodity
If buyers pay taxes of P1,000, what is the after tax price?
How much do consumers pay with the tax? how much do they bear of the tax burden?
Sellers end up receiving how much? and bear how much of the tax burden.
What is your conclusion based on your analysis?
2. Now suppose the demand curve is more inelastic than above with the same tax and equilibrium quantity and price. Analyze the effect of tax if the demand is more inelastic. What will happen to the tax burden? Do the same thing in a separate graph as above. State your conclusion based on your analysis

Answer 1

1. The new price for the commodity will be between P7,000 and P8,000.

If buyers pay taxes of P1,000, then the after tax price is P7,000.

The consumers pay the higher amount of the tax burden.

Sellers end up receiving market price minus tax and bear the lower amount of the tax burden.

The conclusion is that the tax in this case is not efficient and decrease total surplus.

2. If the demand is more inelastic, then the tax burden for consumers will be higher.