What will happen to the equilibrium price of coffee

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Consider the following fiscal scheme designed to directly transfer welfare from coffee drinkers to coffee vendors: The government will impose a $1.00 tax, collected from buyers, for each cup of coffee sold. The government will then subsidize coffee vendors $1.00 for each cup of coffee sold.

a. What will happen to the equilibrium price of coffee?

b. What will happen to the equilibrium quantity of coffee?

c. How will the outcome of this scheme differ from one in which the government collects a $1.00 tax for each cup of coffee sold, and divides the total tax collections equally among all coffee vendors? (It is safe to assume that all coffee vendors are identical.)

Reference no: EM131403825

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