Quantity demanded=-20P+100 Quantity Supplied=50+10P

Question

A lump sum tax of $1 is levied on suppliers. Find new price, quantity and incidence of taxation on consumers?

Answer 1

A lump sum tax will not change the sellers plans since it doesn't change the marginal cost, only the fixed costs. So in a way, this is a trick question. There will be no change to the market.

Now if the question said "an excise tax" instead of a lump sum tax, then the sellers would sell fewer units and the buyers would buy less. The difference between the equilibrium price and the price buyers pay after the tax would be the tax incidence.

Here's how to solve for equilibrium:

Set Qd = Qs

-20P +100 = 50 +10P

50 = 30P

P = 1.67 or 1 2/3