What Is The Effect Of Imposition Of A Tax On Perfect Competition?


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Muhammad Abdullah786 Profile
Lump sum tax:
The lump sum tax is just like fixed costs. Accordingly in short run when fixed tax is imposed it will not affect marginal cost. Hence in short run neither price nor price will be effective. However both in short run and long run if the firms are earning normal profits because of rose in the fixed cost the average cost will be rise. Hence, the firm will face losses and may leave the industry. Because of rise in fixed costs the industry supply curve will shift left words. Hence the price will rise will rise and output will fall.

Imposition of profit tax:
Such tax is concerned with the percentage of the profit. The effect of such tax will be similar to that of lump sum. It will not affect the marginal cost. The price and output will nit be effective in short run. However in long run because of such tax the firm normal profits will be converted into losses. The price will rise and output will fall.

Imposition of sale tax:
The imposition of a sales tax will result in increasing the MC of the firm in short run. The marginal cost curve will shift to left. The production will decrease and price will increase. The same will occur in the whole market. In short run as well as in long run. Now the question before us is this what will be the effect on price after imposition of sales tax. Whatever price will increase equal to sales tax, less than sales tax or more than sales tax. All such depends upon the elasticity of supply curve wile demand curve is given. If the supply curve is more elastic the major share of sales tax is shifted over to the consumers. In case supply curve is less elastic the increase in price because of sales tax will be less.

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