to raise funds at providing more support for public schools,a state government has just imposed a unit excise tax equal to $4 for each monthly unit of telephone services sold by each telephone company operating in the state. The diagram below depicts the position of the demand and supply curves for telephone services before the unit excise tax was imposed. Use this diagram to determine the position of the new market supply curve now that the tax was imposed.
a. Does imposing the $4-per-month unit excise tax cause the market price of telephone services to rise by $4 per month?why or why not?
b. What potion of the $4-per-month unit excise tax is paid by consumers? What portion is paid by providers of telephone services?
To determine the position of the new market supply curve after the imposition of the unit excise tax, we need to understand how the tax affects both consumers and providers of telephone services.
a. Imposing the $4-per-month unit excise tax does not necessarily cause the market price of telephone services to rise by $4 per month. The reason for this is that the tax burden is shared between consumers and providers.
b. The portion of the $4-per-month unit excise tax that is paid by consumers and providers depends on the price elasticity of demand and supply. If the demand for telephone services is relatively inelastic (meaning that consumers are not very responsive to changes in price) and the supply is relatively elastic (meaning that providers can easily adjust the quantity supplied), then consumers will bear a larger portion of the tax burden.
To understand this, we can look at the diagram. If we draw a vertical line from the quantity demanded at the original equilibrium point to the new market supply curve, this represents the increase in price due to the tax.
The portion of the tax burden paid by consumers is represented by the decrease in quantity demanded. The consumers will pay the tax if the decrease in quantity demanded is greater than the increase in price, indicating that they are relatively insensitive to price changes.
The portion of the tax burden paid by providers is represented by the decrease in quantity supplied. The providers will pay the tax if the decrease in quantity supplied is greater than the increase in price, indicating that they are relatively sensitive to price changes.
In general, if demand is more price inelastic than supply, consumers will bear a larger portion of the tax burden. Conversely, if supply is more price elastic than demand, providers will bear a larger portion of the tax burden.
It is important to note that the specific distribution of the tax burden depends on the specific elasticity of demand and supply for telephone services, which can vary from case to case.