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CA Foundation · Business Economics · Theory of Demand and Supply

The government imposes a per-unit excise tax on the production of cold drinks. Other things remaining the same, what is the likely effect on the supply curve of cold drinks?

The supply curve shifts to the left. An excise tax raises the cost of supplying each unit, so producers offer less at every price. A subsidy would do the opposite and shift supply rightward.

  1. AIt shifts to the left, as the tax raises the cost of supplying each unitCorrect
  2. BIt shifts to the right, as producers expand output
  3. CIt remains unchanged, as the tax is paid by consumers
  4. DIt becomes perfectly inelastic

Explanation

A per-unit tax adds to the cost of production, so producers supply less at each price. The supply curve shifts leftward (upward). Option 3 is wrong because the tax is levied on producers and changes their willingness to supply, regardless of who finally bears it.

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