Lump Sum Tax:  

In perfect competition, there is large number of buyers and sellers, products are homogeneous, there are no barriers to enter and exit, buyers and sellers have perfect knowledge about the market conditions and there is perfect mobility of resources and the absence of transportation cost. Supply and demand forces determine the price of a commodity. Short run equilibrium of a firm is based on the total revenue and total cost, and marginal revenue and marginal cost. Firms in an industry try to maximize their profits by adjusting the output to a level where MC=MR. Long run equilibrium plays a crucial role in deciding the existence of the firm. Taxes such as a lump sum tax, a profit tax, or a specific tax, will have an effect on price and output. Imposition of a lump sum tax will not affect the firm and industry in the short run. However it will affect the firm and industry in the long run. Imposition of a profit tax will also affect the firm and industry in the long run. The lesser the proportion of specific tag the firm bears, the more will be the burden of the consumer. Perfect Competition works because the Market Price (what the firm can receive for selling one extra unit) is exactly equal to the Marginal Cost(what the firm needs to give up to produce one extra unit) that is, Both the consumer and the firm place the exact same value on the final unit sold. If Fixed Cost increases, due to a lump-sum tax, change in capital cost, etc., Average Cost increases, but AVC and MC remain unchanged. The short run price and quantity do not change; however, the firm's profits fall. If the added expense is permanent, then Long Run Average Cost will be higher, some firms will exit, supply will decrease, and price will rise sufficiently to restore the remaining firms to zero profits.