Assuming upward sloping supply curve and downward sloping demand curve, imposition of an excise tax has which of the following effects on the equilibrium quantity of a good? Quantity remains the same Depends on the amount of tax imposed Quantity increases Quantity decreases
The Correct Answer and Explanation is:
The correct answer is “Quantity decreases.”
When an excise tax is imposed on a good, the price of the good typically increases due to the tax burden. This increases the cost to consumers and often reduces the quantity of the good demanded. At the same time, the supply curve shifts upward because producers now have to pay the tax for each unit they produce, increasing their costs.
Explanation:
- Supply and Demand Curves: In a typical market, the supply curve slopes upward, indicating that as the price increases, producers are willing to supply more of the good. The demand curve slopes downward, showing that as the price of a good increases, consumers tend to demand less of it.
- Imposition of an Excise Tax: When the government imposes an excise tax, it increases the cost of production or consumption, depending on who bears the burden of the tax. Producers will likely pass on some or all of the tax to consumers, leading to a higher price for the good. This increase in price leads to a decrease in the quantity demanded because consumers are now less willing or able to buy the good at the higher price.
- Impact on Equilibrium: The tax shifts the supply curve upward by the amount of the tax (if producers bear the full tax burden), or it can be shared between consumers and producers, depending on the price elasticity of demand and supply. The tax effectively reduces the equilibrium quantity because the higher price causes a reduction in the quantity demanded, while the increased production cost may discourage some producers from supplying the good.
- Long-Term Effects: Over time, the equilibrium quantity will stabilize at a lower level than it would have been without the tax, unless other factors (such as subsidies or changes in consumer preferences) influence the market.
Thus, an excise tax typically causes a decrease in the equilibrium quantity, as higher prices reduce demand and supply is constrained by higher costs.
