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Discuss the effect of the sales tax on the market efficiency

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Reference no: EM132414689

Consider a perfectly competitive market with

Market demand function: Qd = 1000 - 2P

Market supply function: Qs = 2P

a. Suppose there is no sales tax. What is the equilibrium price and equilibrium quantity? What is the consumer surplus and producer surplus?

b. Now suppose the government imposes a sales tax of $50 per unit on consumers. What is the new equilibrium price and equilibrium quantity? What is the new consumer surplus and producer surplus? What is the tax revenue?

c. Show your answer in a) and b) in a well labelled diagram. Discuss the effect of the sales tax on the market efficiency.

Reference no: EM132414689

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