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Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364

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BuyFindarrow_forward

Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364
Textbook Problem

In a market where the supply curve is perfectly inelastic how does an excise tax affect the price paid by consumers and the quantity bought and sold?

To determine

The affect of excise tax on the price paid by consumers and quantity purchased and sell in the market condition of perfectly inelastic supply.

Explanation

The sellers in the perfectly inelastic supply condition does not care about the price as the quantity supplied by them is being maintained i.e. remain unchanged even in situation of introduction of any tax. This means that the tax burden of the newly introduced tax is borne by the seller only.

The following diagram will clear the affect of tax more:

As seen in the diagram, the price Pe is the price paid by consumer before the excise tax introduced

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