Question #5: Analyze the effect of a specific and a lump-sum tax on

cost curves.
Lump-sum tax
In the short run the lump-sum tax will not affect the MC cost curve and
the firm will continue to produce the same output as before the
imposition of the tax.
However, if the firm was earning just normal profits prior to the tax, it
will not be covering its ATC at the going market price and will close
down in the long run. Thus, in the long run the market-supply curve will
shift to the left as firms leave the industry; the output will be lower and
the price higher as compared with the pre-tax equilibrium.
Specific sales tax:
This takes the form of a given amount of money (e.g., rps.5) per unit of
output produced. Such a tax clearly affects the MC of the firm. The MC
curve, which is also the supply curve of the firm, will shift upwards to
the left, and the amount produced at the going price will be reduced.
The market-supply curve will shift upwards to the left and price will
rise.
the burden of the specific tax that will be borne by the consumer
(buyer) depends on the price elasticity of supply, given the market
demand. In general, the most elastic the market supply the higher the
proportion of the tax that the consumer will bear and the less the
burden of the firm from the specific tax.
So long as the market supply has a positive slope the specific tax will be
paid partly by the buyer and partly by the firm. The burden to the firm
will be smaller the greater the elasticity of supply. In other words, the
firms will be able to pass on to the consumer more of the specific tax,
the more elastic the market supply.