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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

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

Draw the supply and demand curves for cookies. If the government imposes a tax on cookies, show what happens to the price paid by buyers, the price received by sellers, and the quantity of cookies sold. In your diagram, show the deadweight loss from the tax. Explain the meaning of the deadweight loss.

To determine
The impact of tax on equilibrium price and quantity and deadweight loss.

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 the public expenditure of the government. The main types of taxes include the income tax, wealth tax and the professional tax. When a tax is imposed on the commodity, it will lead to the increased price from the equilibrium level and the price to the consumer rises which will reduce the consumer surplus. The price received by the sellers also decline which will reduce the producer surplus in the economy. Thus, with the tax, the equilibrium quantity falls and the price increases this can be illustrated as follows:

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