Workshop3.P&R.KEY - Workshop 3#1 Given most common...

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Workshop 3 #1 Given most common goods, will a new specific tax on the purchase and use of the good increase or decrease its equilibrium quantity? Will consumers benefit or lose? Will producers of the product benefit or lose? When a tax is imposed on a good or service, less of the good or service is produced (supply decreases) and less is consumed (demand decreases). The tax raises the equilibrium price, and decreases the equilibrium quantity. The amount of the tax is transferred unequally to both consumers and producers, with consumers paying the greater part of the tax. This means the incidence of the tax is greater on the consumers than producers. In the language of economics, a price increase results in the loss of economic surplus, in this case representing a loss in both producer and consumer surplus. In essence, both consumers and producers lose when a tax is imposed. Note that the supply and demand diagram could be used to illustrate the effect of the tax increase. When the tax is imposed, the cost of producing the good or service increases, thus there is a decrease in supply (supply curve shifts to the left). The result is that equilibrium quantity decreases and equilibrium price increases. #2 Why are government imposed "average cost pricing" and "nationalization of industries so pricing is at marginal cost" both second best outcomes to the competitive markets? P=MC=min ATC long run equilibrium? The best and desired outcomes happen in competitive markets, when price is determined by the
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This note was uploaded on 03/01/2010 for the course ECON 30601E taught by Professor Morvey during the Summer '09 term at Buena Vista.

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Workshop3.P&R.KEY - Workshop 3#1 Given most common...

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