Indirect Tax (ad valorem)
The domestic market of good X is described by the equations: QD = 200 - P & Qs = 20 + 2P. The government decides to intervene in the market in order to increase its revenues by the imposition of 25% indirect tax per unit. What are the consequences to the stekeholders due to the imposition of the indirect tax? The pre tax situation in the market is described by the accompanying graph. After the imposition of the tax, producers received lower price per unit (Pp) than the price per unit which consumer pay (Pc). More specifically, Pp=0,75xPc. Thus, the cost of production is increased because Q's = 20 + 2x(0,75Pc) and the supply curve shifts upwards from Qs = 20 + 2P to Qs' = 20 + 1,5P. The after tax situation in the market is represented diagrammatically below. The conssequences to the different stakeholders are: 1. The consumer surplus decreases from $9800 to $8192. 2. The producer surplus decreases from $4800 to $3996. 3. Government revenues inc...