$3$ The government is contemplating imposing a transaction tax on stock market trades, that is$,$ a fixed cost of $1$ would be imposed on each trade. Comment on the effects of this law should it be adopted, in the context of the material covered in this course.

Specifically, comment on

$3\mathrm{.}1$ The impact on the serial correlation patterns of stocks. Will it be possible to make trading profits from this pattern?

$3\mathrm{.}2$ How is the learning process affected?

$3\mathrm{.}3$ Will the impact on stocks be uniform across stocks?

$3\mathrm{.}4$ Analyse the tax using the G$-$M model. In each round of trading, either an uninformed trader arrives or an informed trader arrives, just

as in the standard G$-$M model. Also, trading occurs over multiple periods, so the market maker can learn and adjust $.$ The trader pays the tax.

Discuss the range of prices in which the informed trader will

trade, and the range in which he will not trade. It will be helpful

to include schematic diagrams.

The market maker understands the optimal trading decision of

the informed trader, and therefore adjusts his pricing rule accordingly. Discuss the pricing rule in each case.