The government's per-unit tax revenue is the gap between the consumer price (p1) and the supplier's net price (p0). For the 30% sales tax, this means the consumer price, p1, is 30% higher than the price suppliers receive, p0. The price p0 is found on the original market supply curve at the new equilibrium quantity, q1.

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This diagram analyzes the impact of a 30% sales tax on the salt market, using a graph where the horizontal axis represents quantity and the vertical axis represents price. The market initially features a downward-sloping demand curve and an upward-sloping 'Market supply' curve, which intersect at the equilibrium point A (q-star, p-star). With the tax, a new 'Market supply with tax' curve is introduced, which is located above the original supply curve and is also steeper. This new supply curve intersects the demand curve at a new equilibrium, point B (q1, p1). This results in a lower equilibrium quantity (q1 is less than q-star) and a higher equilibrium price (p1 is greater than p-star). The per-unit tax revenue is the vertical distance at quantity q1 between the consumer price (p1) and the supplier price (p0), with p0 being the price on the original supply curve at that quantity.

Graphical Analysis of a 30% Sales Tax on the Salt Market (Figure 8.23)

To cite the ebook, use The CORE Econ Team 2023 The Economy 2.0: Microeconomics Open access e-text https://core-econ.org/the-economy/.

To cite a unit, use The CORE Econ Team 2023 The Economy 2.0: Microeconomics Open access e-text https://core-econ.org/the-economy/ Unit [unit number] (url).

CORE Econ - The Economy 2.0: Microeconomics

The new market equilibrium after the tax is at point B, where the demand curve meets the new 'Market supply with tax' curve. This equilibrium (q1, p1) involves a lower quantity of salt being traded and a higher price for consumers compared to the initial state. Notably, the consumer price does not rise by the full 30% of the tax. This is because consumers react to the price hike by purchasing less salt, which in turn leads to lower production and a fall in the marginal cost of producing it.

New Equilibrium in the Salt Market After a Tax (Point B)

The initial equilibrium in the salt market is depicted on a graph where the horizontal axis represents quantity and the vertical axis represents price. The equilibrium point, designated as A (q-star, p-star), is the intersection of the downward-sloping demand curve and the upward-sloping market supply curve. The supply curve originates at a lower value on the vertical axis.

Initial Equilibrium in the Salt Market

Government's Per-Unit Tax Revenue in the 30% Salt Tax Example

Figure 8.24 demonstrates the consequences of a 30% tax on salt, specifically detailing its impact on consumer and producer surplus, as well as on the prices paid by consumers and received by producers. The tax causes a portion of the surplus to be transferred from consumers and producers to the government. Crucially, it results in a decrease in the total surplus when compared to the initial, tax-free equilibrium, creating a deadweight loss.

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