Answer to Question #110446 in Microeconomics for zahid butt

Question

if Govt. impose 1 Rs tax on cigarettes packets, how it will affect the consumer surplus and producer surplus. the equilibrium price is 4 Rs and equilibrium quantity is 100 packets. construct the graph and explain it.

Answer 1

If the government imposes 1 Rs tax on a package of cigarets, than the supply will decrease, as shown on the diagram. But the new equlibrium won't be at prise 5Rs, because of elasticity of demand. New equilibrium depends on demand and supply elasticity. On the diagram i've shonw one example, where price in new equilibrium is between 4Rs and 5Rs, and the quantity in the equilibrium is less that previous equilibrium(100).

Surpluses befor tax:

Comnsumer: a+b+g.

Producer: c+f+d+e.

Surpluses after tax:

Consumer: a.

Producer: d.

Government: b+c.

Losses of eficienty: g+f+e.