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ACCA Applied Knowledge · Business and Technology · Microeconomic factors

In a market for handmade chairs, the government introduces a per-unit tax on producers. Which of the following correctly describes the immediate effect on the market diagram?

The supply curve shifts left, equivalently upwards, because the tax raises producers' costs. This leads to a higher equilibrium price and a lower quantity traded. The tax is charged on producers, so the initial shift is in supply, not demand.

  1. AThe demand curve shifts left because buyers must pay the tax
  2. BThe supply curve shifts left (upwards), raising the equilibrium price and reducing the quantity tradedCorrect
  3. CThe supply curve shifts right, lowering the equilibrium price
  4. DThere is a movement down the supply curve with no change in the curve

Explanation

A per-unit tax raises producers' costs, so they supply less at each price: the supply curve shifts left or upwards. The new equilibrium has a higher price and a lower quantity. Option A wrongly puts the shift on the demand side, as the tax is levied on producers.

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