Assume we have a market for sodas with Demand downward sloping and Supply upward sloping where the current equilibrium price is $1.25 per can. Now assume that the government imposes a tax of $0.50 per each can sold where the seller must give $0.50 to the government for each can sold.
(a) Will the new equilibrium price of sodas be above $1.75, below $1.75 or equal to $1.75. Please explain your answer.
(b) Will there be a deadweight loss after the tax is imposed. If your answer is no, then please explain why not. If your answer is yes, then please explain why there is a deadweight loss.