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Suppose that in an effort to raise revenue from the wealthy, the government introduces a tax on purchases of yachts. In contrast to most taxes on goods, the tax is physically paid by consumers rather than producers. Assume that the yacht industry is perfectly competitive and that it was in long-run equilibrium before the introduction of the tax.
a. What effect, if any, will the introduction of the tax have on the market demand and supply curves for yachts? What will be the short-run effect of the tax on the quantity of yachts, the price received by sellers, and the price paid by buyers?
b. How will the tax affect consumer surplus and producer surplus, and show the deadweight loss caused by the tax. Why does the tax cause a deadweight loss? What factors determine the size of the deadweight loss?
c. How will the tax affect the quantity produced by the typical yacht producer in the short run? After the introduction of the tax, will profits of the typical yacht producer be positive, negative, or zero in the short run (or is it not possible to tell)?
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