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Question
Explain how an increase in sales tax can cause an increase in price.
Solution
Sales tax is an example of an indirect tax, and its implementation and growth raise the market prices of products and services. The introduction of indirect taxes raises the cost of production for businesses. As a result, the market supply curve moves to the left as the equilibrium price falls. As a result, a new equilibrium is established with a lower quantity and a higher price than the prior equilibrium. As a result, the price rises.
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