What is the impact of the tax on efficiency

Reference no: EM133711885

Imagine that producers of gold are typically barely able to change the quantity of gold they produce in the short-run: that is, the supply of gold is highly unresponsive to price changes in the market for gold. In contrast, assume that the demand for gold is highly responsive to price changes in the market for gold The government decides to implement a tax on such a market for gold.

(a) What is the impact of the tax on the price and quantity of gold? Utilise a graph to complement your answer.

(b) What is the impact of the tax on efficiency (i.e. welfare)? Utilise a graph to complement your answer. Ensure you include clear intuition (i.e., without referring to technical features from the graph) as to why this overall change in society's welfare occurs. (6 marks) (c) Using the graph you drew for question 1(b), identify the burden of the tax borne by the producer versus consumer and explain the reason and intuition behind their relative sizes.

Reference no: EM133711885

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