Figure: Model of a Competitive Market
(Figure: Model of a Competitive Market) Given the figure Model of a Competitive Market, if there are external costs, a tax imposed on sellers will:
A)decrease the equilibrium quantity.
B)increase the equilibrium quantity.
C)have no effect on the equilibrium price.
D)decrease the equilibrium price.

Question

Quizplus · Accepted Answer

When there are external costs, the market equilibrium is not socially efficient. In order to internalize the external costs, a tax imposed on sellers will increase their costs of production, leading to a leftward shift of the supply curve. As a result, the equilibrium quantity will decrease, while the equilibrium price will increase due to the new tax burden on sellers.