When a tax is levied on buyers, the a. supply curves shifts upward by the amount of the tax. b. tax creates a wedge between the price buyers effectively pay and the price sellers receive. c. tax has no effect on the well-being of sellers. d. All of the above are correct.

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Business

Gisselle Pittman

3 August, 23:14

When a tax is levied on buyers, the a. supply curves shifts upward by the amount of the tax. b. tax creates a wedge between the price buyers effectively pay and the price sellers receive. c. tax has no effect on the well-being of sellers. d. All of the above are correct.

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Giovanna · Answer 1

b. tax creates a wedge between the price buyers effectively pay and the price sellers receive.

Explanation:

The effect of a tax on buyers is to distort the market outcome: instead of the economic efficiency maximization that results in a trasanction under the equilibrium price, in abscence of tax, and in the free market, the tax places a higher burden on buyers, causing them to pay a higher price for the good.

The difference between the higher price, and the price in the abscence of the tax, is the tax revenue, which the government takes, not the seller.

For this reason, the tax places a wedge between the price the buyers pay, and the price sellers receive, because now the transaction does not represent a net gain for the same amount for both sellers and buyers, but the government takes part of the revenue (the wedge).