An ad valorem tax shifts the supply curve
a. down by the amount of the tax.
b. up by the amount of the tax.
c. by rotating it counter-clockwise.
d. by rotating it clockwise.
e. None of the above.
The correct answer and explanation is:
The correct answer is b. up by the amount of the tax.
An ad valorem tax is a tax based on the value of a product or service, typically a percentage of the price. When an ad valorem tax is applied to a good or service, it directly impacts the supply side of the market, shifting the supply curve upward (or to the left) by the amount of the tax.
Here’s how this works: When producers face an ad valorem tax, they incur an additional cost in producing each unit of the good. This cost increases the total cost of production. As a result, suppliers are willing to produce and sell the same quantity of goods only at a higher price to cover the cost of the tax. Thus, the supply curve shifts upward by the amount of the tax.
In economic terms, the supply curve represents the relationship between the price of a good and the quantity that producers are willing to supply. A shift upward means that for every quantity of the good, suppliers now require a higher price to supply the same amount, because they must account for the tax in their costs. This makes the good more expensive to supply, leading to a reduction in the quantity supplied at any given price level, hence shifting the supply curve upward.
This shift is not a rotation of the curve. A rotation would occur if the change were in the shape of the curve, where one part of the curve pivots while another part stays fixed. Instead, the whole curve shifts, indicating that at every price level, the supply of goods has decreased by the tax amount. Therefore, the correct answer is that the supply curve shifts up by the amount of the tax.