Consider the general equilibrium effects of a tax. Assume that there are two goods, coffee and...

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Consider the general equilibrium effects of a tax. Assume that there are two goods, coffee and tea. Also assume that these goods are substitutes. A tax is levied on coffee. This causes the supply function of coffee to shift (12). Equilibrium price in the coffee market increases. hence the demand for (14) effect back (13). Therefore the price of tea increases. This causes a tea to into the coffee market.; demand for coffee increases. These mechanisms cause shifts in demand functions in both markets. Once the adjustment mechanism stops, one would observe that the impact of the tax on the price of coffee in a general equilibrium analysis is in a partial equilibrium analysis. (15) the impact of the tax Consider the general equilibrium effects of a tax. Assume that there are two goods, coffee and tea. Also assume that these goods are substitutes. A tax is levied on coffee. This causes the supply function of coffee to shift (12). Equilibrium price in the coffee market increases. hence the demand for (14) effect back (13). Therefore the price of tea increases. This causes a tea to into the coffee market.; demand for coffee increases. These mechanisms cause shifts in demand functions in both markets. Once the adjustment mechanism stops, one would observe that the impact of the tax on the price of coffee in a general equilibrium analysis is in a partial equilibrium analysis. (15) the impact of the tax

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12 A Supply decrease as cost of production increase ... View the full answer