Consider a market with the following characteristics. There is a single monopolist whose technology exhibits constant marginal costs; i.e., The market demand curve exhibits constant elasticity, e. There is an ad valorem tax on the price of the good sold so that when the consumer pays a pricePD, the monopolist receives a price of Ps = (1 - T)PD. (HerePDis the demand price facing the consumer andPsis the supply price facing the producer.) . The taxing authority is considering changing the ad valorem tax to a tax on output, t, so that we will havePDPs+ t. You have been hired to calculate the output tax t that is equivalent to the ad valorem tax T in the sense that the final price facing the consumer is the same under either scheme.
Consider a market with the following characteristics. There is a single monopolist whose technology exhibits constant marginal costs; i.e.,
The market
The taxing authority is considering changing the ad valorem tax to a tax on output, t, so that we will havePDPs+ t. You have been hired to calculate the output tax t that is equivalent to the ad valorem tax T in the sense that the final price facing the consumer is the same under either scheme.
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