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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

A $1 per unit tax levied on consumers of a good is equivalent to

a. a $1 per unit tax levied on producers of the good.

b. a $1 per unit subsidy paid to producers of the good.

c. a price floor that raises the good's price by $1 per unit.

d. a price ceiling that raises the good’s price by $1 per unit.

To determine
The impact of tax on consumers and sellers.

Explanation

The tax is the unilateral payment from the people to the government. Tax is the main source of income of the government which can be used for carrying on public expenditure of the government.

Option (a):

When the tax is imposed on the consumers, they will react to it by shifting the demand curve towards the left by the size of imposed tax (here, it is $1), which will decline the quantity demanded in the economy. When the tax is imposed on the sellers, they will react by shifting the supply curve upward by the size of imposed tax which will reduce the quantity supplied and quantity demanded. Thus, the unitary tax of $1 imposed on the consumers is equivalent to $1 tax imposed on the sellers. So, option 'a' is correct.

Option (b):

When the tax is imposed on the consumers, they will react to it by shifting the demand curve towards the left by the size of imposed tax (here, it is $1), which will decline the quantity demanded in the economy. When the tax is imposed on the sellers, they will react by shifting the supply curve upward by the size of tax imposed which will reduce the quantity supplied and quantity demanded...

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