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**Unformatted text preview: **ECON 401 Section: Supply and Demand With Taxes Comparative Statics Sarah E. Taylor University of Michigan, Department of Economics January 10, 2011 In this set of notes I will pose to you some sample questions on taxes and some solution techniques for solving them. Then I will give you a detailed example. 1 How does the equilibrium price of consumers and suppliers change as a tax changes? Suppose that the price paid by consumers is p D and the price received by suppliers is p S . In addition, suppose we have a tax on the sale of a good such that the after-tax price received by suppliers is p S = p D- τ . 1 In lecture, we refer to the price paid by consumers as the “equilibrium price.” Suppose we want to find dp D dτ and dp S dτ . 1.1 Explicitly 1. Q S = Q D and p D- τ = p S Set supply equal to demand in equilibrium and the after-tax price paid by con- sumers equal to the price received by suppliers. These are your two equilibrium conditions. 2. Substitution 1 This solution technique can similarly used to solve for a tax on consumers; the equation relating the price paid by consumers and the price paid by suppliers will be the same. 1 Substitute in p S = p D- τ into the supply side of the equation setting supply equal to demand. You will be left with an equation which has in it p D and τ , as well as any other exogenous variables.as well as any other exogenous variables....

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