In Chapter 4, you learned that when an excise tax is imposed on buyers or sellers in a competitive market, the equilibrium price rises, and the tax payment is shared between buyers and sellers. To obtain that result, we used the (short-run) market supply curve. Now let’s extend the analysis to the long run. Draw a two panel diagram: one panel for the market (demand and short-run supply curves only), the other panel for the typical firm (demand and LRATC curves only). Suppose an excise tax (some number of dollars per unit) is imposed on all sellers (firms) in this market.

a. Show what will happen in the market in the short run.

b. Show what will happen in both diagrams (market and typical firm) in the long run, assuming that this is a constant cost industry.

c. In the long run, do both buyers and sellers share in the payment of the excise tax? Explain briefly.