Multiple Choice
How does the concept of deadweight loss apply to a per unit tax imposed on a good in a competitive market?
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6. Introduction to Taxes and Subsidies
Introducing Taxes and Tax Incidence
Multiple Choice
When the government passes a new tax on fast food that takes effect immediately, what is most likely to happen to the equilibrium price and quantity in the fast food market?
A
The equilibrium price increases and the equilibrium quantity decreases.
B
Both the equilibrium price and quantity remain unchanged.
C
The equilibrium price decreases and the equilibrium quantity increases.
D
Both the equilibrium price and quantity increase.
Verified step by step guidance1
Identify the type of tax imposed by the government. In this case, it is a tax on fast food, which acts as an additional cost to producers (a supply-side tax).
Understand how a supply-side tax affects the supply curve. A tax increases production costs, causing the supply curve to shift leftward (or upward), meaning at every price, less quantity is supplied.
Analyze the new equilibrium by finding the intersection of the demand curve and the new supply curve. Since supply decreases, the equilibrium quantity will fall.
Determine the effect on equilibrium price. With supply reduced and demand unchanged, the price consumers pay tends to rise to balance the market.
Conclude that the new equilibrium will have a higher price and a lower quantity compared to the original equilibrium, reflecting the tax's impact on the fast food market.
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