K, the stock of capital, cannot jump at the time of the implementation of the tax. Thus q must jump down so that the economy is on the new saddle path point A< Intuitively, since the government is now taking a fraction of profits, existing capital is less valuable and so the market value of capital falls. The economy then moves up the new saddle path with K falling and q rising. Intuitively, the lower market value of capital discourages investment and so the capital stock begins falling. As it does so, profits begin to rise and thus so does the market value of capital, reaching a new equilibrium.