Question

1. Draw and label a graph depicting a government tax on suppliers of a good.

   1. Start with a graph depicting general market equilibrium with the demand curve being relatively flatter then the supply curve.

   2. Modify the graph to demonstrate the effect of a tax on the supplier on the market.

Answer 1

Ans) When government imposes tax, burden is shared by both buyers and sellers. Now who will bear greater burden of tax depends upon the elasticity of demand and supply. Accordingly, the less elastic side of the market bears greater burden of tax.

Now, a flatter curve is more elastic and steeper curve is less elastic.

Here, as it is mentioned that demand curve is flatter, demand is less elastic and hence buyers will bear less burden of tax.

Further, a tax on suppliers will shift the supply curve to the left.

[Pb is price paid by buyers after tax and Ps is price received by sellers after tax]