Plz help~ Economics question...first year university level :(?

Question

hi! i have this economics class problem that im not sure if it's right or not...

the question was something like if government place a tax on original price (P1), what would happen to supply curve. will quantity output remain same?

what i think:

- supply curve will shift to left cuz increase in price....new price will be P2 but output of quantity will remain same.

consumers is just paying P2...producers receiving P1. and tax goes to government.

is it right?

Answer 1

Depends on whom gov will levy tax. If on seller/producer then supply curve will shift up (left) so equilibrium price will rise (if demand is not vertical) and equilibrium quantity will fall.

http://www.heritage.org/Research/Taxes/i...

Answer 2

I don't know really, but that sounds right.

maybe tax is thought of as input  expense?

Answer 3

Sounds like a pigouvian tax to me. Ok, let's assume it is a pigouvian tax. Pigouvian tax increases  the AVC of the firm, thereby causing a reduction in supply. In another words, a leftward shift of the supply curve like what you said, and price increase. However, not forgetting that the firm is faced with a downward sloping demand curve, hence a price increase will means the new equilibrium output is reduced as well. It is difficult to explain surplus in words, but roughly, if your diagram is correct, you will see that both producer and consumer surplus are reduced, a triangular deadweigh inefficiency loss and a rectangular government revenue. Hope that answers your question :)