Suppose all firms in a perfectly competitive market structure are in
long-run equilibrium. Then demand for the firms’ product increases.
Initially, price and economic profits rise. Soon afterward, the
government decides to tax most (but not all) of the economic profits,
arguing that the firms in the industry did not earn them – the profits
were simply the result of an increase in demand. What effect, if any,
will the tax have on market adjustment?
Economics Homework Solutions
#9907
Microeconomics: impact tax has after an increase in demand for a product.
Suppose all firms in a perfectly competitive market structure are in long-run equilibrium. The demand for the firms' product increases. Initially, price and economic profits rise. Soon afterward, the government decides to tax most (but not all) of the economic profits, arguing that the firms in the industry did not earn them - the profits were simply the result of an increase in demand. What effect, if any, will the tax have on market adjustment?
The solution looks at the impact tax has after an increase in demand for product.
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