Assume that the equilibrium price of a good is P1. Assume next that the government imposes a commodity tax on the price of a good. In the new equilibrium, the relationship between the price received by the seller PS and the price paid by the buyer PB is then written as PB = (1+t)Ps, where t is the percentage tax rate (this is called an ad valorem tax). Compare the prices PB and PS to P1. Under what circumstances the price fall suffered by the seller is larger than the price rise suffered by the buyer?

Explain.

(Hint: Draw a graph of demand and supply and show how prices change if the supply curve shifts as a result of the tax)