Suppose the demand curve for a product is vertical and the supply curve is upward sloping. If a unit tax is imposed in the market for this product,
Question
Suppose the demand curve for a product is vertical and the supply curve is upward sloping. If a unit tax is imposed in the market for this product,
Solution
If a unit tax is imposed in the market for this product, the following will happen:
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The vertical demand curve indicates that the quantity demanded by consumers does not change with price. This means consumers are perfectly inelastic to price changes, they will buy the same amount regardless of the price.
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The upward sloping supply curve shows that as the price of the product increases, suppliers are willing to produce more of the product.
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When a unit tax is imposed, it increases the cost of production for suppliers. This will shift the supply curve to the left, indicating a decrease in supply at each price level.
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Since the demand is perfectly inelastic (vertical), consumers will still demand the same quantity even though the price has increased due to the tax.
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Therefore, the entire burden of the tax will be borne by the consumers. The price they pay will increase by the full amount of the tax.
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The quantity traded in the market will remain the same, but the price paid by consumers will increase, and the price received by producers will decrease by the amount of the tax.
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The government will collect tax revenue equal to the amount of the tax times the quantity sold.
In conclusion, when a unit tax is imposed in a market with a vertical demand curve and an upward sloping supply curve, the entire tax burden falls on consumers, the price increases by the full amount of the tax, and the quantity traded remains the same.
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