Answer to Question #258574 in Microeconomics for Sonu

Question

The initial equilibrium is e, where the linear supply curve intersects the linear demand curve. Show the welfare effects of imposing a specific tax τ. Now suppose the demand curve becomes flatter, but still goes through point e, so that it is more elastic at e than originally. Discuss how the tax affects the equilibrium, CS, PS, welfare, and DWL differently than with the original demand curve.

Answer 1

The welfare effect of imposing specific tax to the equilibrium is to shift the quantity toward a point where the before-tax demand minus the before-tax supply is the amount of tax.

When the demand curve is becomes flatter, it means that the price of quantity decreased.

However the equillibrium is not affected by the tax effect.

The CS reduced due to the tax effect.

The PS was not affected by the tax effect.

The welfare decreased due to the tax effect.

The DWL increased due to the decreased taxes.