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Chapter 5: Q.30 (page 131)

30. 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?

Short Answer

Expert verified

If supply is completely inelastic, an excise tax has no effect on purchasers, but the net price received by producers falls short of the price paid by buyers by the whole value of the excise tax. With the exercise tax, suppliers will be responsible for the entire tax burden.

Step by step solution

01

Definition

Tax Structure: There are three types of taxes in the United States: regressive, proportional, and progressive. Higher-income earners are impacted more than lower-income earners by a progressive tax. Excise tax is a type of sales tax that is imposed on speicifc items in which the tax rate is constant regardless of income.

02

Step 2:Explanation

If supply is completely inelastic, an excise tax has no effect on purchasers, but the net price received by producers falls short of the price paid by buyers by the whole value of the excise tax. One of the six supply determinants is excise taxes. They move the supply curve to the left, which reduces supply and raises the equilibrium price. To put it another way, manufacturers face the entire cost of the excise tax.

03

Step 3:Conclusion

Therefore, the supply curve will change until the difference in vertical distance between the two curves equals the tax amount.

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