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15 marker help economics - a level about imposing tax

How do I answer: Explain how the imposition of a tax on a good or service affects both consumer surplus and producer surplus (15 marks)
Reply 1
if demand for a product is inelastic, the tax will be passed onto consumers via higher prices as consumers aren't responsive to an inc in price

CS decreases due to an inc in price, consumers now have to pay higher prices than they were willing and able to pay.

ev- this may be the case in the S/R. However in the long run, consumers benefit if gov have helped to solve market failure such as overconsumption of de-merit goods such as cigarettes= decrease in MPC but also a decrease in MSC= less divergence between both curves. Consumers benefit in the l/r.
also - if demand is elastic, tax will not result in higher prices= businesses will bear the cost

Producer surplus will decrease= higher costs for business. tax= inc cost of production
may have to lay off workers, shut down if AR < AVC.

ev- these are unintended consequences, gov failure. Costs of intervention outweigh the benefit. By burdening both consumers and producers so heavily, this results in a reduction in both CS and PS, resulting in an overall deadweight loss of society surplus. if the market was initially allocating resources as desired, and the gov distorts the efficient allocation of resources, promoting outcomes that aren't socially desirable= substantial gov failure.

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