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Economics problem

gerrandesquire
Posts: 1,258
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10/7/2011 2:10:52 AM
Posted: 5 years ago
Suppose the government removes a tax on buyers of a good and levies a tax of the same size on the sellers of the good. How does the change in tax policy affect the price that buyers pay sellers for this good, amount buyers are out of pocket including the tax, amount sellers receive net of tax and quantity of the good sold.

I made the usual demand supply schedule with equilibrium quantity q0 and equilibrium price p0. Since tax on buyers is removed, the dd curve shifts right with an amount equal to t and supply curve left with an amount equal to t. Equilibrium quantity remains same, price rises to p1. So p1 is the price that consumers are willing to pay and producers are willing to receive. Where did the tax disappear?

What's the mistake?
Ragnar_Rahl
Posts: 19,297
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10/7/2011 2:56:22 AM
Posted: 5 years ago
A tax of the same size on the sellers as was previously on the buyers? Not percentage, not relative size, just size? You realize there are typically way more buyers than sellers, thus fewer people will be paying the tax, and the tax will be less per unit of good (thus less imapact on price)?
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RoyLatham
Posts: 4,488
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10/7/2011 1:08:45 PM
Posted: 5 years ago
I don't understand the problem. The unit price to consumers (with tax included in the price) remains the same so the same number of units are sold and the same amount of tax collected.
gerrandesquire
Posts: 1,258
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10/7/2011 2:09:23 PM
Posted: 5 years ago
Suppose initially the price of the good was $5 inclusive of taxes, with a tax of $0.25. When the government removes this tax, the price of the commodity becomes $4.75 for the consumers. (and the demands curve shifts right, according to me.) Since the same tax is levied on the suppliers, The cost for the suppliers increases by $0.25 and it becomes 5.25 (and the supply curve shifts leftwards by an amount equal to 0.25.) Increasing the new equilibrium price and keeping the equilibrium quantity same. Now we have to find the tax incidence in the market. Basically this is the question.
gerrandesquire
Posts: 1,258
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10/8/2011 2:33:01 AM
Posted: 5 years ago
Just thinking out loud here, i think since price is affected, there'd be no shift in the demand curve, but movement along it. Most probably this is the mistake in my assumption.

I need an answers guide.
DevinKing
Posts: 206
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10/19/2011 11:49:51 PM
Posted: 5 years ago
Absolutely nothing changes. The buyer pays the same price in both instances.
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JaredBaker
Posts: 3
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10/20/2011 12:31:28 AM
Posted: 5 years ago
If the tax is shifted from the consumer to the supplier, the supplier makes a complex tax shelter in order to avoid paying those taxes. Google for example as of recently.