Question

Explain the changing balance and tax sharing on the graph when a $ 5 tax is applied to a low product with a market balance price of $ 10?

Answer 1

Answer

• According to the figure , the x axis is for quantity of goods and y axis is for prices of good.
• Downward sloping demand curve ( D ) and upward sloping supply curve ( S) .
• Q' is equilibrium quantity and $10 is equilibrium price. 
• After $ 5 tax is imposed on product then the price of the product increases to $15 ; when price of the product increases to $ 15 than the demand of that product decreases to Q", but supply of product at S* which is more than demand ( Q"). 
• The shaded area ( acdb) is total government revenue which was earn by imposing tax .Tax shared among consumer and producer . The area (acef) is the tax shared by consumer and area (febd) shared by producer . 
• The shaded triangle area is deadweight loss because this area is not consumed by society.