12.1 (a), when a per unit excise tax is imposed on the good, the average cost and the marginal cost of the good would increase at each output by the amount of the tax, say, t. 12.1 shows the short-run average cost (SAC) curves and the associated marginal cost (SMC) curves of a typical firm. To make our discussion easier we shall assume that all firms in the industry are identical and that the number of firms is n 0 before the tax is imposed. The Effects of the Tax in the Short Run : 12.1 illustrates the behaviour of a typical firm and part (b) illustrates the behaviour of the industry. We shall try to know the effects of the tax, under perfect competition, on prices, industry output, firm output and the number of firms in the industry in the short run and in the long run. We shall also assume that technology or factor prices do not depend on total industry output. (But this will not change in any way the effects of the tax if the collection costs are essentially the same for the producers and buyers.) The tax is paid to the government by the producer rather than the buyer. In this article we will discuss about the effects of excise taxes in a competitive industry.Įxcise taxes, also known as commodity taxes, are imposed on the production of commodities generally on a per unit basis.
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