What is the affect of the tax on the marginal cost

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Reference no: EM13223004

Suppose that the economy of Dreamland produces two kinds of goods, puppies and books (including books about how to raise puppies). Further assume that the market for each good is perfectly competitive and that the price of each good is initially equal to the level of long run average cost in each sector.

a. The government of Dreamland is determined to deal with the smelly externality associated with the production, sale and enjoyment of puppies. If the government imposes a $50 tax per puppy on the producers of puppies, what is the affect of the tax on the marginal cost, average variable cost, and average fixed cost of producing puppies?

b. How would the tax on puppies affect the demand for and price of books in Dreamland? (Assume that books and puppies are substitutes).

c. The Dreamland Puppy Lovers Association (also known as DPLA or "dee-plah") claims that the tax on puppies is economically inefficient because it reduces the production and sale of puppies below the free market level. Is this argument right? Why or why not?

d. How does the tax on puppy producers affect the level of employment and wages for workers in the puppy industry?

e. What is the effect of the puppy tax on the number of puppy farms and booksellers in Dreamland over the long run?

Reference no: EM13223004

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